Bridging the Digital Divide to Engage Students in Higher Education
Bridging the Digital Divide to Engage Students in Higher Education
While video-conferencing apps and other social platforms have thrown various higher education institutions a lifeline in the wake of covid-19, research shows that many faculty professors are struggling to maintain the same depth of engagement with students they used to have in a physical classroom setting.
Related content
Accelerating urban intelligence: People, business and the cities of tomorro...
About the research
Accelerating urban intelligence: People, business and the cities of tomorrow is an Economist Intelligence Unit report, sponsored by Nutanix. It explores expectations of citizens and businesses for smart-city development in some of the world’s major urban centres. The analysis is based on two parallel surveys conducted in 19 cities: one of 6,746 residents and another of 969 business executives. The cities included are Amsterdam, Copenhagen, Dubai, Frankfurt, Hong Kong, Johannesburg, London, Los Angeles, Mumbai, New York, Paris, Riyadh, San Francisco, São Paulo, Singapore, Stockholm, Sydney, Tokyo and Zurich.
Respondents to the citizen survey were evenly balanced by age (roughly one-third in each of the 18-38, 39-54 and 55 years and older age groups) and gender. A majority (56%) had household incomes above the median level in their city, with 44% below it. Respondents to the business survey were mainly senior executives (65% at C-suite or director level) working in a range of different functions. They work in large, midsize and small firms in over a dozen industries. See the report appendix for full survey results and demographics.
Additional insights were obtained from indepth interviews with city officials, smart-city experts at NGOs and other institutions, and business executives. We would like to thank the following individuals for their time and insights.
Pascual Berrone, academic co-director, Cities in Motion, and professor, strategic management, IESE Business School (Barcelona) Lawrence Boya, director, Smart City Programme, city of Johannesburg Amanda Daflos, chief innovation officer, city of Los Angeles Linda Gerull, chief information officer, city of San Francisco Praveen Pardeshi, municipal commissioner, Brihanmumbai Municipal Corporation (Mumbai) • Brian Roberts, policy analyst, city of San Francisco Sameer Sharma, global general manager, Internet of Things (IoT), Intel • Marius Sylvestersen, programme director, Copenhagen Solutions Lab Tan Kok Yam, deputy secretary of the Smart Nation and Digital Government, Prime Minister’s Office, SingaporeThe report was written by Denis McCauley and edited by Michael Gold.
Talent for innovation
Talent for innovation: Getting noticed in a global market incorporates case studies of the 34 companies selected as Technology Pioneers in biotechnology/health, energy/environmental technology, and information technology.
Leonardo Da Vinci unquestionably had it in the 15th century; so did Thomas Edison in the 19th century. But today, "talent for innovation" means something rather different. Innovation is no longer the work of one individual toiling in a workshop. In today's globalised, interconnected world, innovation is the work of teams, often based in particular innovation hotspots, and often collaborating with partners, suppliers and customers both nearby and in other countries.
Innovation has become a global activity as it has become easier for ideas and talented people to move from one country to another. This has both quickened the pace of technological development and presented many new opportunities, as creative individuals have become increasingly prized and there has been greater recognition of new sources of talent, beyond the traditional innovation hotspots of the developed world.
The result is a global exchange of ideas, and a global market for innovation talent. Along with growth in international trade and foreign direct investment, the mobility of talent is one of the hallmarks of modern globalisation. Talented innovators are regarded by companies, universities and governments as a vital resource, as precious as oil or water. They are sought after for the simple reason that innovation in products and services is generally agreed to be a large component, if not the largest component, in driving economic growth. It should be noted that "innovation" in this context does not simply mean the development of new, cutting-edge technologies by researchers.
It also includes the creative ways in which other people then refine, repackage and combine those technologies and bring them to market. Indeed, in his recent book, "The Venturesome Economy", Amar Bhidé, professor of business at Columbia University, argues that such "orchestration" of innovation can actually be more important in driving economic activity than pure research. "In a world where breakthrough ideas easily cross national borders, the origin of ideas is inconsequential," he writes. Ideas cross borders not just in the form of research papers, e-mails and web pages, but also inside the heads of talented people. This movement of talent is not simply driven by financial incentives. Individuals may also be motivated by a desire for greater academic freedom, better access to research facilities and funding, or the opportunity to work with key researchers in a particular field.
Countries that can attract talented individuals can benefit from more rapid economic growth, closer collaboration with the countries where those individuals originated, and the likelihood that immigrant entrepreneurs will set up new companies and create jobs. Mobility of talent helps to link companies to sources of foreign innovation and research expertise, to the benefit of both. Workers who emigrate to another country may bring valuable knowledge of their home markets with them, which can subsequently help companies in the destination country to enter those markets more easily. Analysis of scientific journals suggests that international co-authorship is increasing, and there is some evidence thatcollaborative work has a greater impact than work carried out in one country. Skilled individuals also act as repositories of knowledge, training the next generation and passing on their accumulated wisdom.
But the picture is complicated by a number of concerns. In developed countries which have historically depended to a large extent on foreign talent (such as the United States), there is anxiety that it is becoming increasingly difficult to attract talent as new opportunities arise elsewhere. Compared with the situation a decade ago, Indian software engineers, for example, may be more inclined to set up a company in India, rather than moving to America to work for a software company there. In developed countries that have not historically relied on foreign talent (such as Germany), meanwhile, the ageing of the population as the birth rate falls and life expectancy increases means there is a need to widen the supply of talent, as skilled workers leave the workforce and young people show less interest than they used to in technical subjects. And in developing countries, where there is a huge supply of new talent (hundreds of thousands of engineers graduate from Indian and Chinese universities every year), the worry is that these graduates have a broad technical grounding but may lack the specialised skills demanded by particular industries.
Other shifts are also under way. The increasing sophistication of emerging economies (notably India and China) is overturning the old model of "create in the West, customise for the East". Indian and Chinese companies are now globally competitive in many industries. And although the mobility of talent is increasing, workers who move to another country are less likely to stay for the long-term, and are more likely to return to their country of origin. The number of Chinese students studying abroad increased from 125,000 in 2002 to 134,000 in 2006, for example, but the proportion who stayed in the country where they studied after graduating fell from 85% to 69% over the same period, according to figures from the OECD (see page 10).
What is clear is that the emergence of a global market for talent means gifted innovators are more likely to be able to succeed, and new and unexpected opportunities are being exploited, as this year's Technology Pioneers demonstrate. They highlight three important aspects of the global market for talent: the benefits of mobility, the significant role of diasporas, and the importance of network effects in catalysing innovation.
Brain drain, or gain?
Perhaps the most familiar aspect of the debate about flows of talent is the widely expressed concern about the "brain drain" from countries that supply talented workers. If a country educates workers at the taxpayers' expense, does it not have a claim on their talent? There are also worries that the loss of skilled workers can hamper institutional development and drive up the cost of technical services. But such concerns must be weighed against the benefits of greater mobility.
There are not always opportunities for skilled individuals in their country of birth. The prospect of emigration can encourage the development of skills by individuals who may not in fact decide to emigrate. Workers who emigrate may send remittances back to their families at home, which can be a significant source of income and can help to alleviate poverty. And skilled workers may return to their home countries after a period working abroad, further stimulating knowledge transfer and improving the prospects for domestic growth, since they will maintain contacts with researchers overseas. As a result, argues a recent report from the OECD, it makes more sense to talk of a complex process of "brain circulation" rather than a one-way "brain drain". The movement of talent is not simply a zero-sum gain in which sending countries lose, and receiving countries benefit. Greater availability and mobility of talent opens up new possibilities and can benefit everyone.
Consider, for example, BioMedica Diagnostics of Windsor, Nova Scotia. The company makes medical diagnostic systems, some of them battery-operated, that can be used to provide health care in remote regions to people who would otherwise lack access to it. It was founded by Abdullah Kirumira, a Ugandan biochemist who moved to Canada in 1990 and became a professor at Acadia University. There he developed a rapid test for HIV in conjunction with one of his students, Hermes Chan (a native of Hong Kong who had moved to Canada to study). According to the United States Centers for Disease Control, around one-third of people tested for HIV do not return to get the result when it takes days or weeks to determine. Dr Kirumira and Dr Chan developed a new test that provides the result in three minutes, so that a diagnosis can be made on the spot. Dr Kirumira is a prolific inventor who went on to found several companies, and has been described as "the pioneer of Nova Scotia's biotechnology sector".
Today BioMedica makes a range of diagnostic products that are portable, affordable and robust, making them ideally suited for use in developing countries. They allow people to be rapidly screened for a range of conditions, including HIV, hepatitis, malaria, rubella, typhoid and cholera. The firm's customers include the World Health Organisation. Providing such tests to patients in the developing world is a personal mission of Dr Kirumira's, but it also makes sound business sense: the market for invitro diagnostics in the developing world is growing by over 25% a year, the company notes, compared with growth of only 5% a year in developed nations.
Moving to Canada gave Dr Kirumira research opportunities and access to venture funding that were not available in Uganda. His innovations now provide an affordable way for hospitals in his native continent of Africa to perform vital tests. A similar example is provided by mPedigree, a start-up that has developed a mobile-phone-based system that allows people to verify the authenticity of medicines. Counterfeit drugs are widespread in the developing world: they are estimated to account for 10-25% of all drugs sold, and over 80% in some countries. The World Health Organisation estimates that a fake vaccine for meningitis, distributed in Niger in 1995, killed over 2,500 people. mPedigree was established by Bright Simons, a Ghanaian social entrepreneur, in conjunction with Ashifi Gogo, a fellow Ghanaian. The two were more than just acquaintances having met at Secondary School. There are many high-tech authentication systems available in the developed world for drug packaging, involving radio-frequency identification (RFID) chips, DNA tags, and so forth.
The mPedigree system developed my Mr Gogo, an engineering student, is much cheaper and simpler and only requires the use of a mobile phone — an item that is now spreading more quickly in Africa than in any other region of the world. Once the drugs have been purchased, a panel on the label is scratched off to reveal a special code. The patient then sends this code, by text message, to a particular number. The code is looked up in a database and a message is sent back specifying whether the drugs are genuine. The system is free to use because the drug companies cover the cost of the text messages. It was launched in Ghana in 2007, and mPedigree's founders hope to extend it to all 48 sub-Saharan African countries within a decade, and to other parts of in the developing world.
The effort is being supported by Ghana's Food and Drug Board, and by local telecoms operators and drug manufacturers. Mr Gogo has now been admitted into a special progamme at Dartmouth College in the United States that develops entrepreneurial skills, in addition to technical skills, in engineers. Like Dr Kirumira, he is benefiting from opportunities that did not exist in his home country, and his country is benefiting too. This case of mPedigree shows that it is wrong to assume that the movement of talent is one-way (from poor to rich countries) and permanent. As it has become easier to travel and communications technology has improved, skilled workers have become more likely to spend brief spells in other countries that provide opportunities, rather than emigrating permanently.
And many entrepreneurs and innovators shuttle between two or more places — between Tel Aviv and Silicon Valley, for example, or Silicon Valley and Hsinchu in Taiwan — in a pattern of "circular" migration, in which it is no longer meaningful to distinguish between "sending" and "receiving" countries.
The benefits of a diaspora
Migration (whether temporary, permanent or circular) to a foreign country can be facilitated by the existence of a diaspora, since it can be easier to adjust to a new culture when you are surrounded by compatriots who have already done so. Some observers worry that diasporas make migration too easy, in the sense that they may encourage a larger number of talented individuals to leave their home country than would otherwise be the case, to the detriment of that country.
But as with the broader debate about migration, this turns out to be only part of the story. Diasporas can have a powerful positive effect in promoting innovation and benefiting the home country. Large American technology firms, for example, have set up research centres in India in part because they have been impressed by the calibre of the migrant Indian engineers they have employed in America. Diasporas also provide a channel for knowledge and skills to pass back to the home country.
James Nakagawa, a Canadian of Japanese origin and the founder of Mobile Healthcare, is a case in point. A third-generation immigrant, he grew up in Canada but decided in 1994 to move to Japan, where he worked for a number of technology firms and set up his own financial-services consultancy. In 2000 he had the idea that led him to found Mobile Healthcare, when a friend was diagnosed with diabetes and lamented that he found it difficult to determine which foods to eat, and which to avoid.
The rapid spread of advanced mobile phones in Japan, a world leader in mobile telecoms, prompted Mr Nakagawa to devise Lifewatcher, Mobile Healthcare's main product. It is a "disease selfmanagement system" used in conjunction with a doctor, based around a secure online database that can be accessed via a mobile phone. Patients record what medicines they are taking and what food they are eating, taking a picture of each meal. A database of common foodstuffs, including menu items from restaurants and fast-food chains, helps users work out what they can safely eat. Patients can also call up their medical records to follow the progress of key health indicators, such as blood sugar, blood pressure, cholesterol levels and calorie intake.
All of this information can also be accessed online by the patient's doctor or nutritionist. The system allows people with diabetes or obesity (both of which are rapidly becoming more prevalent in Japan and elsewhere) to take an active role in managing their conditions. Mr Nakagawa did three months of research in the United States and Canada while developing Lifewatcher, which was created with support from Apple (which helped with hardware and software), the Japanese Red Cross and Japan's Ministry of Health and Welfare (which provided full access to its nutritional database).
Japanese patients who are enrolled in the system have 70% of the cost covered by their health insurance. Mr Nakagawa is now working to introduce Lifewatcher in the United States and Canada, where obesity and diabetes are also becoming more widespread — along advanced mobile phones of the kind once only found in Japan. Mr Nakagawa's ability to move freely between Japanese and North American cultures, combining the telecoms expertise of the former with the entrepreneurial approach of the latter, has resulted in a system that can benefit both.
The story of Calvin Chin, the Chinese-American founder of Qifang, is similar. Mr Chin was born and educated in America, and worked in the financial services and technology industries for several years before moving to China. Expatriate Chinese who return to the country, enticed by opportunities in its fast-growing economy, are known as "returning turtles". Qifang is a "peer to peer" (P2P) lending site that enables students to borrow money to finance their education from other users of the site. P2P lending has been pioneered in other countries by sites such as Zopa and Prosper in other countries.
Such sites require would-be borrowers to provide a range of personal details about themselves to reassure lenders, and perform credit checks on them. Borrowers pay above-market rates, which is what attracts lenders. Qifang adds several twists to this formula. It is concentrating solely on student loans, which means that regulators are more likely to look favourably on the company's unusual business model. It allows payments to be made directly to educational institutions, to make sure the money goes to the right place. Qifang also requires borrowers to give their parents' names when taking out a loan, which increases the social pressure on them not to default, since that would cause the family to lose face.
Mr Chin has thus tuned an existing business model to take account of the cultural and regulatory environment in China, where P2P lending could be particularly attractive, given the relatively undeveloped state of China's financial-services market. In a sense, Qifang is just an updated, online version of the community group-lending schemes that are commonly used to finance education in China. The company's motto is that "everyone should be able to get an education, no matter their financial means".
Just as Mr Chin is trying to use knowledge acquired in the developed world to help people in his mother country of China, Sachin Duggal hopes his company, Nivio, will do something similar for people in India. Mr Duggal was born in Britain and is of Indian extraction. He worked in financial services, including a stint as a technologist at Deutsche Bank, before setting up Nivio, which essentially provides a PC desktop, personalised with a user's software and documents, that can be accessed from any web browser.
This approach makes it possible to centralise the management of PCs in a large company, and is already popular in the business world. But Mr Duggal hopes that it will also make computing more accessible to people who find the prospect of owning and managing their own PCs (and dealing with spam and viruses) too daunting, or simply cannot afford a PC at all. Nivio's software was developed in India, where Mr Duggal teamed up with Iqbal Gandham, the founder of Net4India, one of India's first internet service providers. Mr Duggal believes that the "virtual webtop" model could have great potential in extending access to computers to rural parts of India, and thus spreading the opportunities associated with the country's high-tech boom. A survey of the bosses of Indian software firms clearly shows how diasporas can promote innovation.
It found that those bosses who had lived abroad and returned to India made far more use of diaspora links upon their return than entrepreneurs who had never lived abroad, which gave them access to capital and skills in other countries. Diasporas can, in other words, help to ensure that "brain drain" does indeed turn into "brain gain", provided the government of the country in question puts appropriate policies in place to facilitate the movement of people, technology and capital.
Making the connection
Multinational companies can also play an important role in providing new opportunities for talented individuals, and facilitating the transfer of skills. In recent years many technology companies have set up large operations in India, for example, in order to benefit from the availability of talented engineers and the services provided by local companies. Is this simply exploitation of low-paid workers by Western companies?
The example of JiGrahak Mobility Solutions, a start-up based in Bangalore, illustrates why it is not. The company was founded by Sourabh Jain, an engineering graduate from the Delhi Institute of Technology. After completing his studies he went to work for the Indian research arm of Lucent Technologies, an American telecoms-equipment firm. This gave him a solid grounding in mobile-phone technology, which subsequently enabled him to set up JiGrahak, a company that provides a mobile-commerce service called Ngpay.
In India, where many people first experience the internet on a mobile phone, rather than a PC, and where mobile phones are far more widespread than PCs, there is much potential for phone-based shopping and payment services. Ngpay lets users buy tickets, pay bills and transfer money using their handsets. Such is its popularity that with months of its launch in 2008, Ngpay accounted for 4% of ticket sales at Fame, an Indian cinema chain.
The role of large companies in nurturing talented individuals, who then leave to set up their own companies, is widely understood in Silicon Valley. Start-ups are often founded by alumni from Sun, HP, Oracle and other big names. Rather than worrying that they could be raising their own future competitors, large companies understand that the resulting dynamic, innovative environment benefits everyone, as large firms spawn, compete with and acquire smaller ones.
As large firms establish outposts in developing countries, such catalysis of innovation is becoming more widespread. Companies with large numbers of employees and former employees spread around the world can function rather like a corporate diaspora, in short, providing another form of network along which skills and technology can diffuse. The network that has had the greatest impact on spreading ideas, promoting innovation and allowing potential partners to find out about each other's research is, of course, the internet. As access to the internet becomes more widespread, it can allow developing countries to link up more closely with developed countries, as the rise of India's software industry illustrates. But it can also promote links between developing countries.
The Cows to Kilowatts Partnership, based in Nigeria, provides an unusual example. It was founded by Joseph Adelagan, a Nigerian engineer, who was concerned about the impact on local rivers of effluent from the Bodija Market abattoir in Ibadan. As well as the polluting the water supply of several nearby villages, the effluent carried animal diseases that could be passed to humans. Dr Adelagan proposed setting up an effluent-treatment plant.
He discovered, however, that although treating the effluent would reduce water pollution, the process would produce carbon-dioxide and methane emissions that contribute to climate change. So he began to look for ways to capture these gases and make use of them. Researching the subject online, he found that a research institution in Thailand, the Centre for Waste Utilisation and Management at King Mongkut University of Technology Thonburi, had developed anaerobic reactors that could transform agro-industrial waste into biogas. He made contact with the Thai researchers, and together they developed a version of the technology
suitable for use in Nigeria that turns the abattoir waste into clean household cooking gas and organic fertiliser, thus reducing the need for expensive chemical fertiliser. The same approach could be applied across Africa, Dr Adelagan believes. The Cows to Kilowatts project illustrates the global nature of modern innovation, facilitated by the free movement of both ideas and people. Thanks to the internet, people in one part of the world can easily make contact with people trying to solve similar problems elsewhere.
Lessons learned
What policies should governments adopt in order to develop and attract innovation talent, encourage its movement and benefit from its circulation? At the most basic level, investment in education is vital. Perhaps surprisingly, however, Amar Bhidé of Columbia University suggests that promoting innovation does not mean pushing as many students as possible into technical subjects.
Although researchers and technologists provide the raw material for innovation, he points out, a crucial role in orchestrating innovation is also played by entrepreneurs who may not have a technical background. So it is important to promote a mixture of skills. A strong education system also has the potential to attract skilled foreign students, academics and researchers, and gives foreign companies an incentive to establish nearby research and development operations.
Many countries already offer research grants, scholarships and tax benefits to attract talented immigrants. In many cases immigration procedures are "fast tracked" for individuals working in science and technology. But there is still scope to remove barriers to the mobility of talent. Mobility of skilled workers increasingly involves short stays, rather than permanent moves, but this is not yet widely reflected in immigration policy. Removing barriers to short-term stays can increase "brain circulation" and promote diaspora links.
Another problem for many skilled workers is that their qualifications are not always recognised in other countries. Greater harmonisation of standards for qualifications is one way to tackle this problem; some countries also have formal systems to evaluate foreign qualifications and determine their local equivalents. Countries must also provide an open and flexible business environment to ensure that promising innovations can be brought to market. If market access or financial backing are not available, after all, today's global-trotting innovators increasingly have the option of going elsewhere.
The most important point is that the global competition for talent is not a zero-sum game in which some countries win, and others lose. As the Technology Pioneers described here demonstrate, the nature of innovation, and the global movement of talent and ideas, is far more complicated that the simplistic notion of a "talent war" between developed and developing nations would suggest. Innovation is a global activity, and granting the greatest possible freedom to innovators can help to ensure that the ideas they generate will benefit the greatest possible number of people.
Integrated Transformation: How rising customer expectations are turning com...
Modern customers have it good. Spoilt for choice and convenience, today’s empowered consumers have come to expect more from the businesses they interact with. This doesn’t just apply to their wanting a quality product at a fair price, but also tailored goods, swift and effective customer service across different channels, and a connected experience across their online shopping and in-store experience, with easy access to information they need when they want it.
Meeting these expectations is a significant challenge for organisations. For many, it requires restructuring long-standing operating models, re-engineering business processes and adopting a fundamental shift in mindset to put customer experience at the heart of business decision- making. Download our report to learn more.
Virtual hospital ward rounds involve wider number of clinical experts and families
Virtual hospital ward rounds have been a feature of some medical specialities for around two decades. But as the novel coronavirus spread rapidly in early 2020, the importance of restricting the exposure of the health workforce to infectious patients pushed the needle for this form of telemedicine.
Related content
Value-based healthcare in Sweden: Reaching the next level
The need to get better value from healthcare investment has never been more important as ageing populations and increasing numbers of people with multiple chronic conditions force governments to make limited financial resources go further.
These pressures, along with a greater focus on patient-centred care, have raised the profile of VBHC, especially in European healthcare systems. Sweden, with its highly comprehensive and egalitarian healthcare system, has been a leader in implementing VBHC from the beginning, a fact that was underscored in a 2016 global assessment of VBHC published by The Economist Intelligence Unit.
This paper looks at the ways in which Sweden has implemented VBHC, the areas in which it has faced obstacles and the lessons that it can teach other countries and health systems looking to improve the value of their own healthcare investments.
Breast cancer patients and survivors in the Asia-Pacific workforce
With more older women also working, how will the rising trend of breast cancer survivorship manifest in workplace policies, practices and culture? What challenges do breast cancer survivors face when trying to reintegrate into the workforce, or to continue working during treatment? How can governments, companies and society at large play a constructive role?
This series of reports looks at the situation for breast cancer survivors in Australia, New Zealand and South Korea. It finds that while progress has been made, more needs to be done, particularly in South Korea, where public stigma around cancer remains high.
The Cost of Silence
Cardiovascular diseases levy a substantial financial toll on individuals, their households and the public finances. These include the costs of hospital treatment, long-term disease management and recurring incidence of heart attacks and stroke. They also include the costs of functional impairment and knock-on costs as families may lose breadwinners or have to withdraw other family members from the workforce to care for a CVD patient. Governments also lose tax revenue due to early retirement and mortality, and can be forced to reallocate public finances from other budgets to maintain an accessible healthcare system in the face of rising costs.
As such, there is a need for more awareness of the ways in which people should actively work to reduce their CVD risk. There is also a need for more primary and secondary preventative support from health agencies, policymakers and nongovernmental groups.
To inform the decisions and strategies of these stakeholders, The Economist Intelligence Unit and EIU Healthcare, its healthcare subsidiary, have conducted a study of the prevalence and costs of the top four modifiable risk factors that contribute to CVDs across the Asian markets of China, Australia, Hong Kong, Japan, Singapore, South Korea, Taiwan and Thailand.
Download the report to learn more.
Does decoupling dampen or boost tech investment opportunity? Well it depends...
Does decoupling dampen or boost tech investment opportunity? Well it depends...
In the summer of 2019 The Economist Intelligence Unit asked global institutional investors and asset owners which sectors in China they found most attractive. Technology was cited by 58%,1 making it the top answer above financial or healthcare services. Although trade tensions had started ramping up at that time, a majority of survey respondents still expected to boost exposure to China’s economy.
Related content
The China position: Gauging institutional investor confidence
The China position: Gauging institutional investor confidence is an Economist Intelligence Unit report, comissioned by Invesco. It analyses results from a survey of 411 institutional investor and asset owner organisations (approximately 200 in Europe, Middle East and Africa, 100 in North America, and 100 from Asia-Pacific). The key findings of the survey are as follow:
A majority (nine in ten) of our survey respondents claim some level of dedicated exposure to China. Investments are growing; about half of respondents with dedicated China exposure report their investments have “risen significantly” in the past 12 months. Equities are the most-cited way organisations invest in China. Over 60% of respondents with dedicated China exposure report both equities and fixed income onshore holdings. Respondents cited improvements to their own China expertise as the top driver for dedicated investment exposure. Nearly four in ten respondents say environmental, social and governance (ESG) factors play a role in all of their investment decisions; fewer than three in ten say ESG is particularly important for China investments. Chinese asset classes in our survey could see increased investment from foreign organisations over the next 12 months, with respondents highlighting technology, financial services and “new economy” sectors as most attractive. Risk assessments are largely even across asset classes, but on a regional split respondents in APAC are more concerned than counterparts in North America or EMEA. Respondents are mixed on the impact of US-China trade tensions, with similar numbers expecting a positive or negative effect. But a majority of respondents report that their organisations expect to increase exposure over the next 12 months, regardless of outlook. About three-quarters of survey respondents say China’s economy will improve over the next 12 months; about two-thirds say the same for global economic conditions.Our thanks are due to the following individuals for their time and insights:
Jimmy Chang, chief investment strategist, Rockefeller Capital Management Mark Delaney, deputy chief executive and chief investment officer, Australian Super Kevin Wade, chief investment officer, Superannuation Arrangements of the University of London (SAUL)Download the report for more insights.
Infographic: The China position
China has now emerged as the world’s largest economy by purchasing power parity and is a market that investors cannot ignore. To learn more about the confidence level of institutional investor and asset owner organisations in China and the opportunities and concerns over the next 12 months, click here to download the full report.
The Hinrich Foundation Sustainable Trade Index 2018
Yet the enthusiasm in Asia for trade does not appear to have waned. This broad societal consensus behind international trade has enabled Asian countries to continue broadening and deepening existing trading relationships, for example, by quickly hammering out a deal for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in early 2018 following the US’s withdrawal from its predecessor in 2017.
Asia, then, finds itself in the unique position of helping lead and sustain the global economy’s commitment to free and fair trade. It is in this context that the need for sustainability in trade is ever more crucial.
The Hinrich Foundation Sustainable Trade Index was created for the purpose of stimulating meaningful discussion of the full range of considerations that policymakers, business executives, and civil society leaders must take into account when managing and advancing international trade.
The index was commissioned by the Hinrich Foundation, a non-profit organisation focused on promoting sustainable trade. This, the second edition of the study, seeks to measure the capacity of 20 economies—19 in Asia along with the US—to participate in the international trading system in a manner that supports the long-term domestic and global goals of economic growth, environmental protection, and strengthened social capital. The index’s key findings include:
Countries in Asia, especially the richer ones, have broadly regressed in terms of trade sustainability. Hong Kong is developed Asia’s bright spot, recording a slight increase in its score and topping the 2018 index. Several middle-income countries perform admirably, led by Sri Lanka. For the economic pillar, countries generally performed well in terms of growing their labour forces as well as their per-head GDPs. For the social pillar, sharp drops for some countries in certain social pillar indicators contribute to an overall decline. For the environmental pillar, with deteriorating environmental sustainability in many rich countries, China, Laos and Pakistan are the only countries to record increases in scores. Sustainability is an ever more important determinant of FDI and vendor selection in choosing supply-chain partners. Companies are improving the sustainability of their supply chains by restructuring and broadening relationships with competitors and vendors.Innovating through tech in the GCC
Innovating through tech in the GCC
About this research
Innovating through tech in the GCC is an Economist Intelligence Unit report, supported by the Bahrain Economic Development Board. The report examines how both local and international companies in the GCC are integrating advanced technologies to offer innovative products and services to the market.
Related content
Accelerating urban intelligence: People, business and the cities of tomorro...
About the research
Accelerating urban intelligence: People, business and the cities of tomorrow is an Economist Intelligence Unit report, sponsored by Nutanix. It explores expectations of citizens and businesses for smart-city development in some of the world’s major urban centres. The analysis is based on two parallel surveys conducted in 19 cities: one of 6,746 residents and another of 969 business executives. The cities included are Amsterdam, Copenhagen, Dubai, Frankfurt, Hong Kong, Johannesburg, London, Los Angeles, Mumbai, New York, Paris, Riyadh, San Francisco, São Paulo, Singapore, Stockholm, Sydney, Tokyo and Zurich.
Respondents to the citizen survey were evenly balanced by age (roughly one-third in each of the 18-38, 39-54 and 55 years and older age groups) and gender. A majority (56%) had household incomes above the median level in their city, with 44% below it. Respondents to the business survey were mainly senior executives (65% at C-suite or director level) working in a range of different functions. They work in large, midsize and small firms in over a dozen industries. See the report appendix for full survey results and demographics.
Additional insights were obtained from indepth interviews with city officials, smart-city experts at NGOs and other institutions, and business executives. We would like to thank the following individuals for their time and insights.
Pascual Berrone, academic co-director, Cities in Motion, and professor, strategic management, IESE Business School (Barcelona) Lawrence Boya, director, Smart City Programme, city of Johannesburg Amanda Daflos, chief innovation officer, city of Los Angeles Linda Gerull, chief information officer, city of San Francisco Praveen Pardeshi, municipal commissioner, Brihanmumbai Municipal Corporation (Mumbai) • Brian Roberts, policy analyst, city of San Francisco Sameer Sharma, global general manager, Internet of Things (IoT), Intel • Marius Sylvestersen, programme director, Copenhagen Solutions Lab Tan Kok Yam, deputy secretary of the Smart Nation and Digital Government, Prime Minister’s Office, SingaporeThe report was written by Denis McCauley and edited by Michael Gold.
Talent for innovation
Talent for innovation: Getting noticed in a global market incorporates case studies of the 34 companies selected as Technology Pioneers in biotechnology/health, energy/environmental technology, and information technology.
Leonardo Da Vinci unquestionably had it in the 15th century; so did Thomas Edison in the 19th century. But today, "talent for innovation" means something rather different. Innovation is no longer the work of one individual toiling in a workshop. In today's globalised, interconnected world, innovation is the work of teams, often based in particular innovation hotspots, and often collaborating with partners, suppliers and customers both nearby and in other countries.
Innovation has become a global activity as it has become easier for ideas and talented people to move from one country to another. This has both quickened the pace of technological development and presented many new opportunities, as creative individuals have become increasingly prized and there has been greater recognition of new sources of talent, beyond the traditional innovation hotspots of the developed world.
The result is a global exchange of ideas, and a global market for innovation talent. Along with growth in international trade and foreign direct investment, the mobility of talent is one of the hallmarks of modern globalisation. Talented innovators are regarded by companies, universities and governments as a vital resource, as precious as oil or water. They are sought after for the simple reason that innovation in products and services is generally agreed to be a large component, if not the largest component, in driving economic growth. It should be noted that "innovation" in this context does not simply mean the development of new, cutting-edge technologies by researchers.
It also includes the creative ways in which other people then refine, repackage and combine those technologies and bring them to market. Indeed, in his recent book, "The Venturesome Economy", Amar Bhidé, professor of business at Columbia University, argues that such "orchestration" of innovation can actually be more important in driving economic activity than pure research. "In a world where breakthrough ideas easily cross national borders, the origin of ideas is inconsequential," he writes. Ideas cross borders not just in the form of research papers, e-mails and web pages, but also inside the heads of talented people. This movement of talent is not simply driven by financial incentives. Individuals may also be motivated by a desire for greater academic freedom, better access to research facilities and funding, or the opportunity to work with key researchers in a particular field.
Countries that can attract talented individuals can benefit from more rapid economic growth, closer collaboration with the countries where those individuals originated, and the likelihood that immigrant entrepreneurs will set up new companies and create jobs. Mobility of talent helps to link companies to sources of foreign innovation and research expertise, to the benefit of both. Workers who emigrate to another country may bring valuable knowledge of their home markets with them, which can subsequently help companies in the destination country to enter those markets more easily. Analysis of scientific journals suggests that international co-authorship is increasing, and there is some evidence thatcollaborative work has a greater impact than work carried out in one country. Skilled individuals also act as repositories of knowledge, training the next generation and passing on their accumulated wisdom.
But the picture is complicated by a number of concerns. In developed countries which have historically depended to a large extent on foreign talent (such as the United States), there is anxiety that it is becoming increasingly difficult to attract talent as new opportunities arise elsewhere. Compared with the situation a decade ago, Indian software engineers, for example, may be more inclined to set up a company in India, rather than moving to America to work for a software company there. In developed countries that have not historically relied on foreign talent (such as Germany), meanwhile, the ageing of the population as the birth rate falls and life expectancy increases means there is a need to widen the supply of talent, as skilled workers leave the workforce and young people show less interest than they used to in technical subjects. And in developing countries, where there is a huge supply of new talent (hundreds of thousands of engineers graduate from Indian and Chinese universities every year), the worry is that these graduates have a broad technical grounding but may lack the specialised skills demanded by particular industries.
Other shifts are also under way. The increasing sophistication of emerging economies (notably India and China) is overturning the old model of "create in the West, customise for the East". Indian and Chinese companies are now globally competitive in many industries. And although the mobility of talent is increasing, workers who move to another country are less likely to stay for the long-term, and are more likely to return to their country of origin. The number of Chinese students studying abroad increased from 125,000 in 2002 to 134,000 in 2006, for example, but the proportion who stayed in the country where they studied after graduating fell from 85% to 69% over the same period, according to figures from the OECD (see page 10).
What is clear is that the emergence of a global market for talent means gifted innovators are more likely to be able to succeed, and new and unexpected opportunities are being exploited, as this year's Technology Pioneers demonstrate. They highlight three important aspects of the global market for talent: the benefits of mobility, the significant role of diasporas, and the importance of network effects in catalysing innovation.
Brain drain, or gain?
Perhaps the most familiar aspect of the debate about flows of talent is the widely expressed concern about the "brain drain" from countries that supply talented workers. If a country educates workers at the taxpayers' expense, does it not have a claim on their talent? There are also worries that the loss of skilled workers can hamper institutional development and drive up the cost of technical services. But such concerns must be weighed against the benefits of greater mobility.
There are not always opportunities for skilled individuals in their country of birth. The prospect of emigration can encourage the development of skills by individuals who may not in fact decide to emigrate. Workers who emigrate may send remittances back to their families at home, which can be a significant source of income and can help to alleviate poverty. And skilled workers may return to their home countries after a period working abroad, further stimulating knowledge transfer and improving the prospects for domestic growth, since they will maintain contacts with researchers overseas. As a result, argues a recent report from the OECD, it makes more sense to talk of a complex process of "brain circulation" rather than a one-way "brain drain". The movement of talent is not simply a zero-sum gain in which sending countries lose, and receiving countries benefit. Greater availability and mobility of talent opens up new possibilities and can benefit everyone.
Consider, for example, BioMedica Diagnostics of Windsor, Nova Scotia. The company makes medical diagnostic systems, some of them battery-operated, that can be used to provide health care in remote regions to people who would otherwise lack access to it. It was founded by Abdullah Kirumira, a Ugandan biochemist who moved to Canada in 1990 and became a professor at Acadia University. There he developed a rapid test for HIV in conjunction with one of his students, Hermes Chan (a native of Hong Kong who had moved to Canada to study). According to the United States Centers for Disease Control, around one-third of people tested for HIV do not return to get the result when it takes days or weeks to determine. Dr Kirumira and Dr Chan developed a new test that provides the result in three minutes, so that a diagnosis can be made on the spot. Dr Kirumira is a prolific inventor who went on to found several companies, and has been described as "the pioneer of Nova Scotia's biotechnology sector".
Today BioMedica makes a range of diagnostic products that are portable, affordable and robust, making them ideally suited for use in developing countries. They allow people to be rapidly screened for a range of conditions, including HIV, hepatitis, malaria, rubella, typhoid and cholera. The firm's customers include the World Health Organisation. Providing such tests to patients in the developing world is a personal mission of Dr Kirumira's, but it also makes sound business sense: the market for invitro diagnostics in the developing world is growing by over 25% a year, the company notes, compared with growth of only 5% a year in developed nations.
Moving to Canada gave Dr Kirumira research opportunities and access to venture funding that were not available in Uganda. His innovations now provide an affordable way for hospitals in his native continent of Africa to perform vital tests. A similar example is provided by mPedigree, a start-up that has developed a mobile-phone-based system that allows people to verify the authenticity of medicines. Counterfeit drugs are widespread in the developing world: they are estimated to account for 10-25% of all drugs sold, and over 80% in some countries. The World Health Organisation estimates that a fake vaccine for meningitis, distributed in Niger in 1995, killed over 2,500 people. mPedigree was established by Bright Simons, a Ghanaian social entrepreneur, in conjunction with Ashifi Gogo, a fellow Ghanaian. The two were more than just acquaintances having met at Secondary School. There are many high-tech authentication systems available in the developed world for drug packaging, involving radio-frequency identification (RFID) chips, DNA tags, and so forth.
The mPedigree system developed my Mr Gogo, an engineering student, is much cheaper and simpler and only requires the use of a mobile phone — an item that is now spreading more quickly in Africa than in any other region of the world. Once the drugs have been purchased, a panel on the label is scratched off to reveal a special code. The patient then sends this code, by text message, to a particular number. The code is looked up in a database and a message is sent back specifying whether the drugs are genuine. The system is free to use because the drug companies cover the cost of the text messages. It was launched in Ghana in 2007, and mPedigree's founders hope to extend it to all 48 sub-Saharan African countries within a decade, and to other parts of in the developing world.
The effort is being supported by Ghana's Food and Drug Board, and by local telecoms operators and drug manufacturers. Mr Gogo has now been admitted into a special progamme at Dartmouth College in the United States that develops entrepreneurial skills, in addition to technical skills, in engineers. Like Dr Kirumira, he is benefiting from opportunities that did not exist in his home country, and his country is benefiting too. This case of mPedigree shows that it is wrong to assume that the movement of talent is one-way (from poor to rich countries) and permanent. As it has become easier to travel and communications technology has improved, skilled workers have become more likely to spend brief spells in other countries that provide opportunities, rather than emigrating permanently.
And many entrepreneurs and innovators shuttle between two or more places — between Tel Aviv and Silicon Valley, for example, or Silicon Valley and Hsinchu in Taiwan — in a pattern of "circular" migration, in which it is no longer meaningful to distinguish between "sending" and "receiving" countries.
The benefits of a diaspora
Migration (whether temporary, permanent or circular) to a foreign country can be facilitated by the existence of a diaspora, since it can be easier to adjust to a new culture when you are surrounded by compatriots who have already done so. Some observers worry that diasporas make migration too easy, in the sense that they may encourage a larger number of talented individuals to leave their home country than would otherwise be the case, to the detriment of that country.
But as with the broader debate about migration, this turns out to be only part of the story. Diasporas can have a powerful positive effect in promoting innovation and benefiting the home country. Large American technology firms, for example, have set up research centres in India in part because they have been impressed by the calibre of the migrant Indian engineers they have employed in America. Diasporas also provide a channel for knowledge and skills to pass back to the home country.
James Nakagawa, a Canadian of Japanese origin and the founder of Mobile Healthcare, is a case in point. A third-generation immigrant, he grew up in Canada but decided in 1994 to move to Japan, where he worked for a number of technology firms and set up his own financial-services consultancy. In 2000 he had the idea that led him to found Mobile Healthcare, when a friend was diagnosed with diabetes and lamented that he found it difficult to determine which foods to eat, and which to avoid.
The rapid spread of advanced mobile phones in Japan, a world leader in mobile telecoms, prompted Mr Nakagawa to devise Lifewatcher, Mobile Healthcare's main product. It is a "disease selfmanagement system" used in conjunction with a doctor, based around a secure online database that can be accessed via a mobile phone. Patients record what medicines they are taking and what food they are eating, taking a picture of each meal. A database of common foodstuffs, including menu items from restaurants and fast-food chains, helps users work out what they can safely eat. Patients can also call up their medical records to follow the progress of key health indicators, such as blood sugar, blood pressure, cholesterol levels and calorie intake.
All of this information can also be accessed online by the patient's doctor or nutritionist. The system allows people with diabetes or obesity (both of which are rapidly becoming more prevalent in Japan and elsewhere) to take an active role in managing their conditions. Mr Nakagawa did three months of research in the United States and Canada while developing Lifewatcher, which was created with support from Apple (which helped with hardware and software), the Japanese Red Cross and Japan's Ministry of Health and Welfare (which provided full access to its nutritional database).
Japanese patients who are enrolled in the system have 70% of the cost covered by their health insurance. Mr Nakagawa is now working to introduce Lifewatcher in the United States and Canada, where obesity and diabetes are also becoming more widespread — along advanced mobile phones of the kind once only found in Japan. Mr Nakagawa's ability to move freely between Japanese and North American cultures, combining the telecoms expertise of the former with the entrepreneurial approach of the latter, has resulted in a system that can benefit both.
The story of Calvin Chin, the Chinese-American founder of Qifang, is similar. Mr Chin was born and educated in America, and worked in the financial services and technology industries for several years before moving to China. Expatriate Chinese who return to the country, enticed by opportunities in its fast-growing economy, are known as "returning turtles". Qifang is a "peer to peer" (P2P) lending site that enables students to borrow money to finance their education from other users of the site. P2P lending has been pioneered in other countries by sites such as Zopa and Prosper in other countries.
Such sites require would-be borrowers to provide a range of personal details about themselves to reassure lenders, and perform credit checks on them. Borrowers pay above-market rates, which is what attracts lenders. Qifang adds several twists to this formula. It is concentrating solely on student loans, which means that regulators are more likely to look favourably on the company's unusual business model. It allows payments to be made directly to educational institutions, to make sure the money goes to the right place. Qifang also requires borrowers to give their parents' names when taking out a loan, which increases the social pressure on them not to default, since that would cause the family to lose face.
Mr Chin has thus tuned an existing business model to take account of the cultural and regulatory environment in China, where P2P lending could be particularly attractive, given the relatively undeveloped state of China's financial-services market. In a sense, Qifang is just an updated, online version of the community group-lending schemes that are commonly used to finance education in China. The company's motto is that "everyone should be able to get an education, no matter their financial means".
Just as Mr Chin is trying to use knowledge acquired in the developed world to help people in his mother country of China, Sachin Duggal hopes his company, Nivio, will do something similar for people in India. Mr Duggal was born in Britain and is of Indian extraction. He worked in financial services, including a stint as a technologist at Deutsche Bank, before setting up Nivio, which essentially provides a PC desktop, personalised with a user's software and documents, that can be accessed from any web browser.
This approach makes it possible to centralise the management of PCs in a large company, and is already popular in the business world. But Mr Duggal hopes that it will also make computing more accessible to people who find the prospect of owning and managing their own PCs (and dealing with spam and viruses) too daunting, or simply cannot afford a PC at all. Nivio's software was developed in India, where Mr Duggal teamed up with Iqbal Gandham, the founder of Net4India, one of India's first internet service providers. Mr Duggal believes that the "virtual webtop" model could have great potential in extending access to computers to rural parts of India, and thus spreading the opportunities associated with the country's high-tech boom. A survey of the bosses of Indian software firms clearly shows how diasporas can promote innovation.
It found that those bosses who had lived abroad and returned to India made far more use of diaspora links upon their return than entrepreneurs who had never lived abroad, which gave them access to capital and skills in other countries. Diasporas can, in other words, help to ensure that "brain drain" does indeed turn into "brain gain", provided the government of the country in question puts appropriate policies in place to facilitate the movement of people, technology and capital.
Making the connection
Multinational companies can also play an important role in providing new opportunities for talented individuals, and facilitating the transfer of skills. In recent years many technology companies have set up large operations in India, for example, in order to benefit from the availability of talented engineers and the services provided by local companies. Is this simply exploitation of low-paid workers by Western companies?
The example of JiGrahak Mobility Solutions, a start-up based in Bangalore, illustrates why it is not. The company was founded by Sourabh Jain, an engineering graduate from the Delhi Institute of Technology. After completing his studies he went to work for the Indian research arm of Lucent Technologies, an American telecoms-equipment firm. This gave him a solid grounding in mobile-phone technology, which subsequently enabled him to set up JiGrahak, a company that provides a mobile-commerce service called Ngpay.
In India, where many people first experience the internet on a mobile phone, rather than a PC, and where mobile phones are far more widespread than PCs, there is much potential for phone-based shopping and payment services. Ngpay lets users buy tickets, pay bills and transfer money using their handsets. Such is its popularity that with months of its launch in 2008, Ngpay accounted for 4% of ticket sales at Fame, an Indian cinema chain.
The role of large companies in nurturing talented individuals, who then leave to set up their own companies, is widely understood in Silicon Valley. Start-ups are often founded by alumni from Sun, HP, Oracle and other big names. Rather than worrying that they could be raising their own future competitors, large companies understand that the resulting dynamic, innovative environment benefits everyone, as large firms spawn, compete with and acquire smaller ones.
As large firms establish outposts in developing countries, such catalysis of innovation is becoming more widespread. Companies with large numbers of employees and former employees spread around the world can function rather like a corporate diaspora, in short, providing another form of network along which skills and technology can diffuse. The network that has had the greatest impact on spreading ideas, promoting innovation and allowing potential partners to find out about each other's research is, of course, the internet. As access to the internet becomes more widespread, it can allow developing countries to link up more closely with developed countries, as the rise of India's software industry illustrates. But it can also promote links between developing countries.
The Cows to Kilowatts Partnership, based in Nigeria, provides an unusual example. It was founded by Joseph Adelagan, a Nigerian engineer, who was concerned about the impact on local rivers of effluent from the Bodija Market abattoir in Ibadan. As well as the polluting the water supply of several nearby villages, the effluent carried animal diseases that could be passed to humans. Dr Adelagan proposed setting up an effluent-treatment plant.
He discovered, however, that although treating the effluent would reduce water pollution, the process would produce carbon-dioxide and methane emissions that contribute to climate change. So he began to look for ways to capture these gases and make use of them. Researching the subject online, he found that a research institution in Thailand, the Centre for Waste Utilisation and Management at King Mongkut University of Technology Thonburi, had developed anaerobic reactors that could transform agro-industrial waste into biogas. He made contact with the Thai researchers, and together they developed a version of the technology
suitable for use in Nigeria that turns the abattoir waste into clean household cooking gas and organic fertiliser, thus reducing the need for expensive chemical fertiliser. The same approach could be applied across Africa, Dr Adelagan believes. The Cows to Kilowatts project illustrates the global nature of modern innovation, facilitated by the free movement of both ideas and people. Thanks to the internet, people in one part of the world can easily make contact with people trying to solve similar problems elsewhere.
Lessons learned
What policies should governments adopt in order to develop and attract innovation talent, encourage its movement and benefit from its circulation? At the most basic level, investment in education is vital. Perhaps surprisingly, however, Amar Bhidé of Columbia University suggests that promoting innovation does not mean pushing as many students as possible into technical subjects.
Although researchers and technologists provide the raw material for innovation, he points out, a crucial role in orchestrating innovation is also played by entrepreneurs who may not have a technical background. So it is important to promote a mixture of skills. A strong education system also has the potential to attract skilled foreign students, academics and researchers, and gives foreign companies an incentive to establish nearby research and development operations.
Many countries already offer research grants, scholarships and tax benefits to attract talented immigrants. In many cases immigration procedures are "fast tracked" for individuals working in science and technology. But there is still scope to remove barriers to the mobility of talent. Mobility of skilled workers increasingly involves short stays, rather than permanent moves, but this is not yet widely reflected in immigration policy. Removing barriers to short-term stays can increase "brain circulation" and promote diaspora links.
Another problem for many skilled workers is that their qualifications are not always recognised in other countries. Greater harmonisation of standards for qualifications is one way to tackle this problem; some countries also have formal systems to evaluate foreign qualifications and determine their local equivalents. Countries must also provide an open and flexible business environment to ensure that promising innovations can be brought to market. If market access or financial backing are not available, after all, today's global-trotting innovators increasingly have the option of going elsewhere.
The most important point is that the global competition for talent is not a zero-sum game in which some countries win, and others lose. As the Technology Pioneers described here demonstrate, the nature of innovation, and the global movement of talent and ideas, is far more complicated that the simplistic notion of a "talent war" between developed and developing nations would suggest. Innovation is a global activity, and granting the greatest possible freedom to innovators can help to ensure that the ideas they generate will benefit the greatest possible number of people.
Integrated Transformation: How rising customer expectations are turning com...
Modern customers have it good. Spoilt for choice and convenience, today’s empowered consumers have come to expect more from the businesses they interact with. This doesn’t just apply to their wanting a quality product at a fair price, but also tailored goods, swift and effective customer service across different channels, and a connected experience across their online shopping and in-store experience, with easy access to information they need when they want it.
Meeting these expectations is a significant challenge for organisations. For many, it requires restructuring long-standing operating models, re-engineering business processes and adopting a fundamental shift in mindset to put customer experience at the heart of business decision- making. Download our report to learn more.
The covid-19 push: Accelerating change in Australian industries | Healthcare
The covid-19 push: Accelerating change in Australian industries | Healthcare
Welcome to our first piece in The covid-19 push: Accelerating change in Australian industries.
Created by The Economist Intelligence Unit and sponsored by Vocus, this series looks at how covid-19 has provided a powerful impetus to accelerate innovation and positive change in key industries, enabling them to bring forward significant benefits for customers, communities and the industries themselves.
More from this series
Related content
Value-based healthcare in Sweden: Reaching the next level
The need to get better value from healthcare investment has never been more important as ageing populations and increasing numbers of people with multiple chronic conditions force governments to make limited financial resources go further.
These pressures, along with a greater focus on patient-centred care, have raised the profile of VBHC, especially in European healthcare systems. Sweden, with its highly comprehensive and egalitarian healthcare system, has been a leader in implementing VBHC from the beginning, a fact that was underscored in a 2016 global assessment of VBHC published by The Economist Intelligence Unit.
This paper looks at the ways in which Sweden has implemented VBHC, the areas in which it has faced obstacles and the lessons that it can teach other countries and health systems looking to improve the value of their own healthcare investments.
Breast cancer patients and survivors in the Asia-Pacific workforce
With more older women also working, how will the rising trend of breast cancer survivorship manifest in workplace policies, practices and culture? What challenges do breast cancer survivors face when trying to reintegrate into the workforce, or to continue working during treatment? How can governments, companies and society at large play a constructive role?
This series of reports looks at the situation for breast cancer survivors in Australia, New Zealand and South Korea. It finds that while progress has been made, more needs to be done, particularly in South Korea, where public stigma around cancer remains high. The Cost of Silence
Cardiovascular diseases levy a substantial financial toll on individuals, their households and the public finances. These include the costs of hospital treatment, long-term disease management and recurring incidence of heart attacks and stroke. They also include the costs of functional impairment and knock-on costs as families may lose breadwinners or have to withdraw other family members from the workforce to care for a CVD patient. Governments also lose tax revenue due to early retirement and mortality, and can be forced to reallocate public finances from other budgets to maintain an accessible healthcare system in the face of rising costs.
As such, there is a need for more awareness of the ways in which people should actively work to reduce their CVD risk. There is also a need for more primary and secondary preventative support from health agencies, policymakers and nongovernmental groups.
To inform the decisions and strategies of these stakeholders, The Economist Intelligence Unit and EIU Healthcare, its healthcare subsidiary, have conducted a study of the prevalence and costs of the top four modifiable risk factors that contribute to CVDs across the Asian markets of China, Australia, Hong Kong, Japan, Singapore, South Korea, Taiwan and Thailand.
Download the report to learn more.
Technology | How will covid-19 reshape key Australian industries?
Technology | How will covid-19 reshape key Australian industries?
The covid-19 pandemic has prompted an unprecedented global reliance on technology. Virtually overnight the workforces of entire companies have been forced to work from home and collaborate remotely while students were moved from the classroom to online learning. When orders were issued to stay at home for everything but essential tasks, people’s health, fitness and social needs also started to be met remotely.
Related content
Financing sustainability: Asia Pacific embraces the ESG challenge
Financing sustainability: Asia Pacific embraces the ESG challenge is an Economist Intelligence Unit report, sponsored by Westpac. It explores the drivers of sustainable finance growth in Asia Pacific as well as the factors constraining it. The analysis is based on two parallel surveys—one of investors and one of issuers—conducted in September and October 2019.
If the countries of Asia Pacific are to limit the negative environmental effects of continued economic growth, and companies in the region are to mitigate their potential climate risks and make a positive business contribution through improving the environment and meeting the UN's Sustainable Development Goals (SDGs), large volumes of investment in sustainable projects and businesses need to be mobilised. A viable sustainable finance market is taking shape in the region to channel commercial investor funds, and both investors and issuers say they are achieving a financial benefit from their investment and financing activities. The market is still in the early stages of development, however, and must expand and mature to meet investor needs.
The chief constraint on sustainable finance growth in the region has been the limited supply of bankable sustainable projects. Our research suggests supply is increasing, but with investor demand continuing to grow apace, the gap will remain an obstacle in the short- to medium-term. Among the organisations in our issuer survey, only 7% have used sustainable finance instruments to fund projects. However, nearly nine in ten (87%) said they intend to do so in the next year, which should begin to bridge the gap between supply and demand.
Based on issuers’ stated intentions, investors will have a range of instruments to choose from, including green loans and bonds and sustainability loans and bonds. Large numbers of investors indicate that they intend to deploy a greater proportion of capital to these over the next three years.
Financing sustainability | Insights video
What is driving the strong demand for financing sustainability in Asia Pacific? How can companies increase supply and start to see the benefits of sustainable finance in the next three years? We interviewed Richard Brandweiner, CEO of Pendal Australia, and Sophia Cheng, CIO of Cathay Financial Holdings and chair of Asia Investor Group on Climate Change, to find out.
To learn more: Download report | View infographic
Financing sustainability | Infographic
Financing sustainability: How do investors and issuers in APAC's sustainable finance market view the present market opportunities and constraints?
To learn more:
Download report | Watch video以靈活應萬變：未来的工作方式
以靈活應萬變：未来的工作方式
隨著新冠肺炎危機對健康和經濟的影響不斷顯現，企業所面臨的更長遠的不確定性因素很容易被忽略。在大中華地區(包括中國大陸、香港、澳門、台灣)，企業領導者須應對各種問題，包括貿易波動加劇、人才短缺、科技進步日新月異、消費者行為不斷變化等。這次疫症大流行自然會促使管理層將注意力轉移到短期業務生存和恢復業務方面。不過，管理層也知道與此同時更應加強面對那些類似的長期商業挑戰。宏觀來說，那就是這次疫情危機反而更會促使企業加快采取行動，而不是被動應對。
對於經濟學人智庫調查的大中華區高級管理人員(以下簡稱「高管」)而言，客戶行為的變化，以及從而擴展到市場的變化，屬於短期內的不明朗因素，情況與疫症大流行等令人擔憂的事情相若。從比較長遠的角度來看，確保能夠保存所需人才很困難，是管理層最感不安的因素，此外還有客戶行為改變、科技更新、市場結構等因素。很多受訪公司都表示，除了一些可以預見的裁員措施，例如減少員工人數和推遲擴張計劃，他們正在採取積極措施，以提高公司的擴展能力、速度、效率。
此項研究的其他主要發現包括：
Related content
The art of managing business uncertainty: A future of work study
As the health and economic impacts of the covid-19 crisis unfold, it is easy to lose sight of longer-standing sources of uncertainty that companies face. In the Greater China region (comprising mainland China, Hong Kong, Macau and Taiwan), business leaders were already grappling with heightened trade volatility, talent shortages, rapid technology advances and the ever-changing behaviours of consumers. The pandemic has naturally pushed management’s attention to shorterterm survival and recovery. But businesses in the region know the need to address more familiar challenges cannot take a back seat for long. If anything, the pandemic crisis has added propellant to the trends driving them rather than freezing them in place.
Changes in customer behaviour—and by extension to markets—pose as much near-term uncertainty to Greater China executives surveyed by The Economist Intelligence Unit as do concerns about the pandemic. Over the longer term, the difficulties of securing and retaining talent cause the greatest degree of management unease, along with changes in customer behaviour, technology and market structure. Alongside some predictable measures of retrenchment, such as reducing headcount and postponing expansion plans, many surveyed firms say they are proactively implementing measures to increase their scalability, speed and efficiency.
Other major findings of the study are:
Amidst gloom, pockets of optimism. Hopes for business improvement this year are low across the Greater Bay Area (Hong Kong, Macau and Guangdong). Spirits are higher in Taiwan, and markedly so on the mainland. Around half (49%) of executives in mainland tier 1 (T1) and 62% in tier 2 (T2) expect industry conditions to improve in the coming months. Almost all respondents in T1 cities (96%, and 80% in T2 cities) express confidence in their firms’ ability to grow revenue in the next 12 months. Improving scalability is high on the agenda. About half of business leaders (49%) believe workforce rigidity holds back the implementation of their business strategy. To address this, the majority of respondent firms (77%) plan to increase their use of temporary or shortterm workers in the coming months. Nearly the same number say they will undertake some form of organisational restructuring and will consolidate work locations. Staff-sharing—a practice launched during the lockdown—is likely to help firms deal with future periods of volatility. Even pessimists are keeping their options open. Among the roughly 20% of respondent firms that expect business conditions to worsen in the next 12 months, only about one-third plan to reduce their spending on technology and research and development (R&D) while around one-sixth plan to increase it. Another 42% will “reorganise their workspace”, which includes redesigning, consolidating or moving offices or other work locations. Remote working is here to stay. Workers will return to their offices as the pandemic crisis recedes, but working remotely is likely to be much more commonplace. More than three-quarters of respondent firms (76%) plan to implement work-from-home and work-from-anywhere practices during the next 12 months, leveraging capabilities such as cloud computing and mobility technology.
Subscribe on iTunes | Spotify | Google podcasts | Your preferred podcasting platforms
以灵活应万变：未来的工作方式
随着新冠肺炎危机对健康和经济的影响不断显现，企业所面临的更长远的不确定性因素很容易被忽略。在大中华地区（中国大陆、香港、澳门和台湾），商界领导者早已在努力应对贸易波动加剧、人才短缺、技术飞速发展以及消费者行为的不停变化。这次疫情自然会促使管理层专注于短期内的业务的存活和和恢复，但是管理者也知道与此同时更应加强面对那些类似的长期商业挑战。宏观来说，那就是这次疫情危机反而更会促使企业加快采取行动，而不是被动应对。
对经济学人智库调研的大中华区高管而言，消费者行为的变化、以及相应的市场变化带来的近期不确定性，与对全球疫情的担忧所造成的不确定性同等重要。从长期来看，最让管理层感到不安的是难以获得人才和保留人才，还有客户行为、技术和市场结构的变化。除了采取裁员和推迟扩张计划等可以预见的紧缩措施外，许多受访公司表示正在积极采取行动，提升可伸缩性、速度和效率。
本研究的其他主要成果包括：
市场低迷之中的转折亮点。整个粤港澳大湾区（香港、澳门和广东，简称：大湾区）对今年业务有起色的期望较低，台湾地区的情绪较为乐观，而中国大陆则信心充足。大陆一线和二线城市的高管当中，约有一半（49%）预计未来几个月行业状况会有所改善。几乎所有一线城市的受访者（96%，二线城市为80%）都表示对公司在未来12个月实现营收增长有信心。 提升灵活性是当务之急。大约半数的公司领导者（49%）认为，刚性的劳动力结构阻碍了企业战略的实施。为了解决这一问题，大多数受访公司（77%）计划在未来几个月内增加使用临时员工或短期合约员工。几乎同等比例的公司表示将进行某种形式的组织重组以及办公室地点调整。在疫情隔离封锁期间，有些公司采取“员工共享”的做法或许可以帮助公司应对未来更多不确定性。 多种预防性应付方案的准备。大约20%的受访公司预计未来12个月内经营状况将会恶化，其中只有三分之一左右的公司打算减少技术和研发的支出，而约六分之一的公司则计划增加支出。另外还有42%的公司将“重组工作空间”，包括重新设计、整合或迁移办公室或其他场所。 远程工作将成常态。随着疫情逐渐消退，员工将重返办公室，但远程工作可能变得更为普遍。超过四分之三的受访公司（76%）计划在未来12个月内、利用云计算和移动技术等实施居家办公和移动办公制度。
Steering through collaboration: CFOs driving new priorities for the future
It is well established that the modern CFO has a more strategic role to play in a business, but a clear action plan to achieve this is lacking. A key element of this is helping the business to deal with change. Some changes are planned: launching a new product or service, setting up operations in a new region or acquiring a competitor. Others may be unexpected: a major disruption to supply-chain operations, the emergence of new regulation and legal reporting requirements or the unpredictable impacts of global economic uncertainty.
Either way, when asked about the biggest challenges they face in executing their day-to-day activities, change is a recurring theme, according to a new survey of 800 CFOs and senior finance executives, conducted by The Economist Intelligence Unit. Managing unexpected changes to financial forecasts and adapting finance processes to rapidly evolving business models are top of mind.
Managing unexpected changes to financial forecasts and adapting finance processes to rapidly evolving business models are top challenges finance executives face in executing their day to-day activities.
Finance executives are also concerned with identifying how to align strategic, financial and operational plans towards common objectives and meaningfully analysing data across business units and regions. “All functions are working to meet these challenges and, as a finance head, we have to have visibility across all functions, how they are progressing [towards meeting goals] and ensuring that their direction is in line with overall strategic goals,” says Lalit Malik, CFO of Dabur, an Indian consumer goods manufacturer. It is incumbent upon CFOs therefore to be prepared not only to help their own function navigate uncharted territory, but the rest of the business too. That means breaking down the silos that commonly exist in organisations, in order to collaborate closely across functions, sharing information and data in the pursuit of common objectives.
All functions are working to meet these challenges and, as a finance head, we have to have visibility across all functions, how they are progressing [towards meeting goals] and ensuring that their direction is in line with overall strategic goals - Lalit Malik, CFO of Dabur, an Indian consumer goods manufacturer.
The clear custodian of collaboration
There are a number of reasons why the role of leading cross-company collaboration around steering should fall to the CFO and their team. First, through the activities of budgeting, the finance function is the custodian of the clear, quantitative expression of management expectations and determines how resources such as cash and people will be allocated in order to achieve them. In our survey, 90% of respondents say that finance should facilitate collaborative enterprise planning to ensure that operational plans are aligned with financial and strategic plans.
Second, through performance management, the finance function is the gatekeeper for critical data that illustrate how well—or otherwise—the company is rising to the challenge of change. That includes data relating to sales, supply chain and delivery, which need to be reported back to the business in ways that help drive improved decisionmaking. Our survey reveals that companies in which finance executives feel empowered to drive strategic decisions across business functions are more likely to report a higher financial performance in fiscal year 2016/17 and 2017/18 and anticipate higher growth rates for 2019/20.
Download Complete Executive Summary PDF
Related content
Overseeing AI: Governing artificial intelligence in banking
The ability to extract value from artificial intelligence (AI) will sort the winners from the losers in banking, according to 77% of bank executives surveyed by The Economist Intelligence Unit in February and March 2020. AI platforms were the second highest priority area of technology investment, the survey found, behind only cybersecurity.
At the time, the covid-19 pandemic was in full effect in Asia and the rest of the world was beginning to understand its gravity. Since then, the depth and extent of covid-19’s impact on consumer behaviour and the global economy have come into clearer focus.
Covid-19 has already triggered an uptick in digital banking—in the US Citibank is reported to have seen a tenfold surge in activity on Apple Pay during lockdown, for example1. But the disruption to businesses and households has only just begun, and banks will need to adapt to rapidly changing customer needs.
As such, the criticality of AI adoption is only likely to increase in the post-pandemic era: its safe and ethical deployment is now more urgent than ever.
In common with most matters of governance and safety, banks will look to regulatory authorities for guidance on how this can be achieved. Until a few years ago regulators adopted a wait-and-see approach but, more recently, many have issued a number of studies and discussion papers.
In order to assess the key risks and governance approaches that banking executives must understand, The Economist Intelligence Unit undertook a structured review of 25 reports, discussion papers and articles on the topic of managing AI risks in banking. The main findings are summarised in the table on page 3 and examined throughout this article.
Risks known and unknown
The nature of the risks involved in banks’ use of AI does not differ materially from those faced in other industries. It is the outcomes that differ should risks materialise: financial damage could be caused to consumers, financial institutions themselves or even to the stability of the global financial system.
Our review reveals that prominent risks include bias in the data that is fed into AI systems. This could result in decisions that unfairly disadvantage individuals or groups of people (for example through discriminatory
Some AI models have a complexity that many organisations, including banks, have never seen before. Prag Sharma, senior vice-president and emerging technology lead, Citi Innovation Labs
lending). “Black box” risk arises when the steps algorithms take cannot be traced and the decisions they reach cannot be explained. Excluding humans from processes involving AI weakens their monitoring and could threaten the integrity of models (see table for a comprehensive list of AI risks in banking).
At the root of these and other risks is AI’s increasingly inherent complexity, says Prag Sharma, senior vice-president and emerging technology lead at Citi Innovation Labs. “Some AI models can look at millions or sometimes billions of parameters to reach a decision,” he says. “Such models have a complexity that many organisations, including banks, have never seen before.” Andreas Papaetis, a policy expert with the European Banking Authority (EBA), believes this complexity—and especially the obstacles it poses to explainability—are among the chief constraints on European banks’ use of AI to date.
Governance challenges
The guidance that regulators have offered so far can be described as “light touch”, taking the form of information and recommendations rather than rules or standards. One possible reason for this is to avoid stifling innovation. “The guidance from governing bodies where we operate continues to encourage innovation and growth in this sector,” says Mr Sharma.
Another reason is uncertainty about how AI will evolve. “AI is still at an early stage in banking and is likely to grow,” says Mr Papaetis. “There isn’t anyone who can answer everything about it now.”
The documents that banking regulators have published on AI range from the succinct (an 11-page statement of principles by MAS—the Monetary Authority of Singapore) to the voluminous (a 195-page report by Germany’s BaFin—its Federal Financial Supervisory Authority), but the guidance they offer converges in several areas.
At the highest level, banks should establish ethical standards for their use of AI and systematically ensure that their models comply. The EBA suggests using an “ethical by design” approach to embed these principles in AI projects from the start. It also recommends establishing an ethics committee to validate AI use cases and monitor their adherence to ethical standards.4
For regulators, paramount among the ethical standards must be fairness—ensuring that decisions in lending and other areas do not unjustly discriminate against individuals or specific groups of people. De Nederlandsche Bank (or DNB, the central bank of the Netherlands) emphasises the need for regular reviews of AI model decisions by domain experts (the “human in the loop”) to help guard against unintentional bias.5 The Hong Kong Monetary Authority (HKMA) advises that model data be tested and evaluated regularly, including with the use of bias-detection software.6 “If you have a good understanding of your underlying data,” says Mr Sharma, “then a lot of the algorithmic difficulties in terms of ethical behaviour or explainability can be addressed more easily”.
Monitoring the modellers at Citi
Bias can creep into AI models in any industry but banks are better positioned than most types of organisations to combat it, believes Prag Sharma, senior vice-president and emerging technology lead at Citi Innovation Labs. “Banks have very robust processes in place, learned over time, that meet strict external [regulatory] and internal compliance requirements,” he says.
At Citi, a model risk management committee reports directly into the bank’s chief risk officer and operates separately from the modellers and data science teams. Consisting of risk experts as well as data scientists, the committee’s task, says Mr Sharma, is to scrutinise the models that his team and others are developing exclusively from a risk perspective. The committee’s existence long predates the emergence of AI, he says, but the latter has added a challenging new dimension to the committee’s work.
Maximising algorithms’ explainability helps to reduce bias. Once a team is ready to deploy a model into production, the model risk management committee studies it closely with explainability one of its key areas of focus. “[The risk managers] instruct us to explain all the model’s workings to them in a way that they will completely understand,” says Mr Sharma. “Nothing hits our production systems without a green light from this committee.”
Ensuring the right level of explainability, as Mr Papaetis suggests, is arguably banks’ toughest AI challenge. Most of the regulator guidance stresses the need for thorough documentation of all the steps taken in model design.
Ensuring the right level of explainability is arguably banks’ toughest AI challenge.
The EBA, says Mr Papaetis, recommends taking a “risk-based approach” in which different levels of explainability are required depending on the impact of each AI application—more, for example, for activities that directly impact customers and less for low-risk internal activities.
Are more prescriptive approaches needed?
Regulators generally consider banks’ existing governance regimes to be adequate to address the issues raised by AI. Rather than creating new AI-specific regimes, most regulators agree that current efforts should instead be focused on updating their governance practices and structures to reflect the challenges posed by AI. Ensuring that the individuals responsible for oversight have adequate AI expertise is integral, according to DNB.
Fit for purpose? Applying existing governance principles to AI
In Europe, bank adoption of AI-based systems may be described as broad but shallow. In a recently published study the European Banking Authority (EBA) found that about two-thirds of the 60 largest EU banks had begun deploying AI but in a limited fashion and “with a focus on predictive analytics that rely on simple models”.7 This is one reason why Andreas Papaetis, a policy expert with the EBA, believes it is too early to consider developing new rules of governance for the EU’s banks that focus on AI.
Mr Papaetis points out that the EBA’s existing guidelines on internal governance and ICT (information and communications technology) risk management are adequate for AI’s current level of development in banking. The existing framework is sufficiently flexible and not overly prescriptive, he says. “That enables us to adapt and capture new activities or services as they develop. So at the moment we don’t think that AI or machine learning require anything additional when it comes to governance.” In any event, the EBA’s approach, he says, will be guided by European Commission policy positions on the role of AI in the economy and society.8
Mr Papaetis does not exclude the possibility of more detailed regulatory guidance on AI in areas such as data management and ethics. Should bias and a lack of explainability prove to be persistent problems, for example, regulators may need to consider drafting more specific rules. But at present, he says, “no one can predict what challenges AI will throw up in the future”.
More regulatory guidance will almost certainly be needed in the future, says Mr Sharma, and some of it may require the drafting of rules. He offers as an example the uncertainty among experts around the retraining of existing AI models. “Does retraining a model lead to the same or a new model from a risk perspective?” he asks. “Does a model need to go through the same risk review process each time it is retrained, even if that happens weekly, or is a lighter-touch approach possible and appropriate?”
Should a major failure be attributed to AI— such as significant financial losses suffered by a group of customers due to algorithm bias, evidence of systematic discrimination in credit decisions or algorithm-induced errors that threaten a bank’s stability—authorities would no doubt revisit their previous guidance and possibly put regulatory teeth into their non-binding recommendations.
The need to monitor and mitigate such risks effectively makes it incumbent on regulators to build AI expertise that meets or betters that of commercial banks. As AI evolves, strong governance will inevitably be demanded at all levels of the banking ecosystem.
[1] Antoine Gara, “The World’s Best Banks: The Future Of Banking Is Digital After Coronavirus”, Forbes, June 8th 2020. https://www.forbes.com/sites/ antoinegara/2020/06/08/the-worlds-best-banks-the-future-of-banking-is-digital-after-coronavirus/
[2]Top three responses shown. For full results “Forging new frontiers: advanced technologies will revolutionise banking”, The Economist Intelligence Unit, 2020. https://eiuperspectives.economist.com/financial-services/forging-new-fro...
[3] The Economist Intelligence Unit reviewed 25 reports, discussion papers and articles published in the past three years by banking and financial sector supervisory authorities, central banks and supranational institutions, as well a handful of reports from universities and consultancies, on the theme of managing the risks associated with AI. The points of guidance listed below are distilled from studies and discussion papers published in the past two years by financial sector supervisory authorities, regulatory agencies and supranational institutions. These include the European Banking Authority, Monetary Authority of Singapore, DNB (Bank of the Netherlands), Hong Kong Monetary Authority, CSSF (Financial Sector Supervisory Authority of Luxembourg), BaFin (Federal Financial Supervisory Authority of Germany), ACPR (Prudential Supervision and Resolution Authority of France), and the European Commission.
[4] European Banking Authority, EBA Report on Big Data and Advanced Analytics, January 2020. https://eba.europa.eu/file/609786/ download?token=Mwkt_BzI
[5] De Nederlandsche Bank, General principles for the use of Artificial Intelligence in the financial sector, July 2019. https://www.dnb.nl/en/binaries/ General%20principles%20for%20the%20use%20of%20Artificial%20Intelligence%20in%20the%20financial%20sector2_tcm47-385055.pdf
[6] Hong Kong Monetary Authority, Reshaping Banking with Artificial Intelligence, December 2019. https://www.hkma.gov.hk/media/eng/doc/keyfunctions/finanical-infrastruct...
[7] ibid.
[8] The commission launched a public debate on AI policy options in early 2020 and is expected to announce its policy decisions later this year.
Forging new frontiers: advanced technologies will revolutionise banking
The coronavirus crisis has focused the attention of banks firmly on new challenges. Bank branch traffic was already falling before the pandemic, and this trend will only intensify with society in lockdown: customers are unable to leave their homes while employees are working remotely or frequently absent due to illness. “Banks have planned for years for disaster recovery if their technology failed but have never planned for disaster recovery if their buildings closed,” says Chris Skinner, a leading influencer and champion of digitalisation in finance. “This is the big lesson of the crisis.”
The lockdown will most likely accelerate the digitisation of banking,1 a sector which already faces intense competition from payment players, big technology and e-commerce firms. According to the latest global banking survey conducted by The Economist Intelligence Unit (now in its seventh year and for the first time expanded to include respondents from commercial and private banks), 45% of respondents say their strategic response to this challenge is to build a “true digital ecosystem”. This aim to integrate self-built digital services and third-party offerings was cited more than any other response and has increased from 41% of respondents in 2019.
This article explores three central elements of banking digitisation: where banks currently are in their digital journey; what they are doing, not only to overcome challenges but also to increase user engagement through different technologies and channels; and how they are seizing opportunities through reorganisation into more agile structures.
Methodology
In February-March 2020 The Economist Intelligence Unit, on behalf of Temenos, surveyed 305 global banking executives on themes relating to the digitisation of banking. The survey included respondents from retail, corporate and private banks in Europe (25%), North America (24%), Asia-Pacific (18%), Africa and the Middle East (16%) and Latin America (17%). Respondents performed different job functions: marketing and sales (18%), IT (13%), customer service (7%) and finance (14%), while almost half were C-suite executives (49%). The coronavirus pandemic emerged half-way through the survey.
The survey is part of a worldwide research programme on new frontiers in a global age of banking. It draws on in-depth interviews with retail, corporate and private wealth banks, regulators, international organisations and consultancies around the world. The survey research and interviews will be featured in a series of articles and an infographic throughout 2020.
New technologies will continue to drive global banking for the next five years while regulatory concerns around these technologies remain top of mind for banking executives.
A large majority of respondents (66%, up from 42% in 2019) cite new technologies such as artificial intelligence (AI), machine learning, blockchain or the Internet of Things (IoT) as having a significant impact on the sector. This highlights the importance of these new tools in fending off the competitive threat posed by tech-driven, non-traditional entrants to the banking sector such as payment players PayPal and ApplePay (cited by 50% of respondents globally), or big tech firms like Google, Facebook and Alibaba (34%).
Regulation of digital technology (such as data protection) has weighed on banks’ profit and loss (P&L) since the 2008 financial crisis and is now considered the second most impactful trend in the industry (as cited by 42% of respondents). New regulation could be a game changer for the development of open banking in certain regions, but it could also allow non-traditional competitors to enter the sector.
There is slightly less apprehension about neobanks (a concern cited by 20%) which have not managed to dent savings or lending volumes to a significant extent. Some early challengers are shifting their strategies from directly offering financial products to selling their expertise to existing banks with bigger brands, more reach and higher capital.2 In fact, 84% believe that fintechs will continue to have a material cost advantage over traditional banks: investing in fintechs is a priority innovation strategy for over a quarter of respondents (26%), and even more so in the retail space (33%).
As the importance of advanced technologies rises, that of changing customer behaviours and demands—while still viewed as impactful by 28% of respondents—continues to decline. In 2019, 31% of respondents cited it as highly significant compared with 58% in 2018. This may be due to the fact that banking clients now display higher digital adoption rates and have established digital expectations. Moreover, a majority of respondents (59%) agree with the statement that “the traditional branch-based banking model will be dead” by 2025, up from 44% in 2019.
In the shift towards enterprise agility, DevOps—a set of practices which bring together software development and IT operations—and modern cloud-based platforms could be transformative, according to 84% of respondents. The computing power and flexibility of cloud-based technologies and services remain of prime interest to banks with 27% of respondents focusing their technology investment in this area (see also below). Unsurprisingly, 81% believe a multi-cloud strategy will become a regulatory prerequisite after several years of regulatory focus on cloud technologies in the UK and the US.3
Banks are adapting their internal structures to digital technologies in order to enhance customer experience, product offering and new revenue streams.
An overwhelming majority of respondents (83%) believe that platformisation of banking and other services through a single entry point will steer the market. This is driving banks towards transforming their existing business models into true digital ecosystems according to 45% of respondents.
Where are banks focusing their digital efforts? For many, technology investment hinges on cybersecurity (35%), which reflects widespread concerns about data breaches. The development of AI platforms like digital advisors and voice assisted engagement channels is cited by 33% of respondents and cloud-based technologies by 27%. AI will undoubtedly play a central role in the digital shift: 77% of respondents agree that unlocking value from AI will be a key differentiator between winning and losing banks.
However, banks may be missing a trick by focusing purely on AI’s customer-facing capabilities while downplaying other benefits in the value chain, which focus more on productivity, customer retention and monitoring functions (see chart 2 below). There are concerns among customers about how AI technologies will use their data and whether it is safe: 34% of respondents expressed concern about lack of clarity surrounding data use while 40% were unsure about the security of their personal financial information. Despite these reservations, there are signs of greater product innovation within the sector: 30% of respondents expect to maintain their own product offerings and become an aggregator of third-party banking or non-banking products (up from 28% last year).
Increasing numbers of banks anticipate AI will help generate new business. “As investment algorithms get more advanced, they will be used more widely in portfolio management. Not to use the over-hyped AI term, but advanced algorithms for investment strategies will gain strength,” explains Nic Dreckmann, chief operating officer and head of intermediaries at private bank Julius Bär.
For the entire customer journey to succeed, respondents report that broader deployment of AI in fraud detection (16%) and backoffice functions (8%) are likely to feature more heavily in future business plans. At HSBC Private Bank, AI is already integrated in back office functions, according to chief operating officer Anil Venuturupalli. For banks worldwide of all sizes, cultural change will be central to deploying technologies such as AI effectively.
Building greenfield banks is an increasingly popular strategy to achieve digital agility.
Last year, building a greenfield digital bank was a top innovation strategy among retail bankers (cited by 36%). A priority again this year for respondents globally (35%), it was particularly strongly expressed by respondents in the wealth sector: 52% believe this to be the best way to compete most cost effectively (see chart 4).
Open bank hub initiatives that give customers access to third-party offerings remain important as respondents’ second preference (29%). This is followed by investment in fintech start-ups, which 26% of respondents cite as part of their innovation strategy. Although less of a concern than in 2019, 25% of banks are looking to participate in sandboxes to collaborate with fintechs and other technology providers to test new propositions.
Banks are also developing digital strategies to move away from their current operating models and promote greater agility. Improving product agility and the ability to launch new products is cited as the third most important strategic priority (26%), after improving customer experience and engagement (32%), and mastering digital marketing (31%). Migrating client usage to digital from physical channels tops the list of priorities for retail banks (35%, compared with 31% globally). Some banks, such as HSBC, have started to build out from existing operations and draw in third-party expertise where necessary to deliver digital private banking around the world. “We are looking at developing a hybrid engagement model where technology will handle all of the administrative touchpoints for our clients,” says Mr Venuturupalli.
Traditional means of banking such as cash will fall by the wayside as agility becomes increasingly aligned with the digitisation of transactions and products. A majority of respondents (75%) think paper notes will represent less than 5% of all retail transactions globally by 2025.
As technology and demand changes at an ever-faster pace, banks in general will need to adopt new working practices and administrative structures that align with their business strategies and priorities, particularly if they are to capitalise on different digital advantages by 2025.
However, it seems developing agile structures that break down internal barriers is not yet a widespread priority given that only 17% of respondents said this was a focal point for their technology investment. This further raises the question of whether banks will be able to achieve their strategic greenfield bank and broad ecosystem plans on time and within budget drawing only on in-house resources.
AI with a profitable purpose
Many banks are clear on what they want to achieve from AI. The dual priorities for CaixaBank of Spain are freeing up staff time and improving employee productivity. The bank processes over 12,000 transactions per second in peak hours and boasts a 900 terabytes data pool to improve the customer experience.
The bank’s 100-strong business intelligence unit uses big data, AI and machine learning to communicate with customers more efficiently. As a result, branch staff levels are half the euro zone average and CaixaBank’s costs are the lowest of its domestic peer group. AIdriven virtual assistants used by advisors and customers have more than doubled sales conversion rates in just one year.
Lessons from lockdown
While the coronavirus pandemic has highlighted how quickly financial institutions need to adjust when the unexpected hits, it has also demonstrated many opportunities to be seized from a digital banking perspective.
As lockdowns were introduced, bank phone services were overwhelmed in the UK and the US.4 Operational processes struggled to incorporate government relief financial schemes, but some banks managed to demonstrate the real value of agility.
Citizens Bank of Edmond, Oklahoma, has just one branch and 55 members of staff. The bank was quick to send out loan relief forms to borrowers and modify overdraft arrangements to offer early access to direct payments from the US government: its speed of response left larger competitors trailing behind. Chief executive Jill Castilla made use of the bank’s social media platforms to offer advice and reassurance—and a personal line of contact for worried customers. Some banks, such as US-based Atlantic Union Bank, moved to streamline their loan application workflows with new digital platforms,5 while others looked to increase their customer outreach via digital channels.6
However, the need to introduce a human touch to the digital experience predates the covid-19 pandemic. Banks were already looking for innovative ways to achieve this, often by providing opt-in communication channels to clients. For example, two US banks— Oregonbased Umpqua Bank and Iowa-based Hills Bank—have been using mobile banking apps that give customers direct access to a digital banker of their choice for a variety of services including bank-account opening and transfer of funds.7 In Turkey, VafikBank has a fleet of direct sales agents who visit digital banking customers at their office or home to provide expert advice on more complex products such as loans.
US digital banking gets a boost
Fintechs have found it harder to challenge the established banks in the US than they have in Europe and Asia. That may be about to change.
Last year, we highlighted progress at Varo Money, a mobile banking firm that offers loans alongside checking and savings accounts. After a three year wait, the Federal Deposit Insurance Corporation approved Varo’s application for a bank charter earlier this year. Once final approval is granted, the licence will eventually allow Varo to offer its accounts to US customers with the same US$250,000 deposit guarantee that established bank customers enjoy.
Varo subsequently received more good news from a surprising source. In March 2020 its New York-based fintech competitor Moven surprised the market by closing its consumer-facing business, blaming market conditions for a lack of development funding.
Moven then chose Varo as the destination of choice for customers facing account closures, citing its core focus on financial wellness. “We care deeply about our Moven banking customers which is why we made the thoughtful decision, as we transition away from our consumer business, to recommend Varo for their banking needs,” said Moven CEO Marek Forysiak.
For Varo Money, finally receiving that national bank charter will be the icing on the cake. Its founder and CEO Colin Walsh comments that “becoming a fully chartered bank will give us greater opportunity to deliver products and services that positively impact the lives of everyday people around the country”.
Click here to view the infographic.
[1] See, for example: https://www.investorschronicle.co.uk/shares/2020/03/11/will-uk-banks-cat... ; https://gulfbusiness.com/howfintech-is-revamping-the-financial-landscape... ; https://www.finextra.com/newsarticle/35561/rush-to-digitisation-will-see...
[2] Moven shuts all consumer accounts, pivots to B2B-only service for banks, Fintech Futures, 26 March 2020 https://www.fintechfutures.com/2020/03/moven-shuts-all-consumer-accounts...
[3] See, for example, https://www.fintechfutures.com/2016/12/fca-green-lights-cloud-technologies/ and https://uk.reuters.com/article/us-usacongress-cloud/u-s-house-lawmakers-...
[4] The inability of some banks to process loans at the start of the crisis was widely reported in the press, for example: https://www.theguardian.com/ business/2020/apr/15/covid-19-bailout-loans-issued-uk-firms-banks
[5] https://www.forbes.com/sites/tomgroenfeldt/2020/04/20/sba-ppp-loans-at-a...
[6] https://ibsintelligence.com/ibs-journal/ibs-news/icici-bank-launches-its...
[7] https://thefinancialbrand.com/94429/umpqua-human-digital-bank-mobile-cha...
The shifting landscape of global wealth: Future-proofing prosperity in a ti...
In some instances the impact of this shift will be shaped by local factors, such as demographic changes. In other instances this shift will reflect shared characteristics, as demonstrated by the greater popularity of overseas investing among younger high-net-worth individuals (HNWIs) brought up in an era of globalisation. Whatever the drivers, the landscape of wealth is changing—from local to global, and from one focused on returns to one founded on personal values.
Despite rising economic concerns and a tradition of investor home bias in large parts of the world, the new landscape of wealth appears less interested in borders. According to a survey commissioned by RBC Wealth Management and conducted by The Economist Intelligence Unit (EIU), younger HNWIs are substantially more enthusiastic about foreign investing. The U.S. is a particularly high-profile example of a country where a long-standing preference for investments in local markets appears set to be transformed.
Click the thumbnail below to download the global executive summary.
Read additional articles from The EIU with detail on the shifting landscape of global wealth in Asia, Canada, the U.S. and UK on RBC's website.
Forging new frontiers: advanced technologies will revolutionise banking
Forging new frontiers: advanced technologies will revolutionise banking
- 66% of banking executives say new technologies will continue to drive the global banking sphere for the next five years while regulatory concerns around these technologies remain top of mind for banking executives (42%).
- 77% of bankers believe that unlocking value from AI will be the differentiator between winning and losing banks.
Related content
Overseeing AI: Governing artificial intelligence in banking
The ability to extract value from artificial intelligence (AI) will sort the winners from the losers in banking, according to 77% of bank executives surveyed by The Economist Intelligence Unit in February and March 2020. AI platforms were the second highest priority area of technology investment, the survey found, behind only cybersecurity.
At the time, the covid-19 pandemic was in full effect in Asia and the rest of the world was beginning to understand its gravity. Since then, the depth and extent of covid-19’s impact on consumer behaviour and the global economy have come into clearer focus.
Covid-19 has already triggered an uptick in digital banking—in the US Citibank is reported to have seen a tenfold surge in activity on Apple Pay during lockdown, for example1. But the disruption to businesses and households has only just begun, and banks will need to adapt to rapidly changing customer needs.
As such, the criticality of AI adoption is only likely to increase in the post-pandemic era: its safe and ethical deployment is now more urgent than ever.
In common with most matters of governance and safety, banks will look to regulatory authorities for guidance on how this can be achieved. Until a few years ago regulators adopted a wait-and-see approach but, more recently, many have issued a number of studies and discussion papers.
In order to assess the key risks and governance approaches that banking executives must understand, The Economist Intelligence Unit undertook a structured review of 25 reports, discussion papers and articles on the topic of managing AI risks in banking. The main findings are summarised in the table on page 3 and examined throughout this article.
Risks known and unknown
The nature of the risks involved in banks’ use of AI does not differ materially from those faced in other industries. It is the outcomes that differ should risks materialise: financial damage could be caused to consumers, financial institutions themselves or even to the stability of the global financial system.
Our review reveals that prominent risks include bias in the data that is fed into AI systems. This could result in decisions that unfairly disadvantage individuals or groups of people (for example through discriminatory
Some AI models have a complexity that many organisations, including banks, have never seen before. Prag Sharma, senior vice-president and emerging technology lead, Citi Innovation Labs
lending). “Black box” risk arises when the steps algorithms take cannot be traced and the decisions they reach cannot be explained. Excluding humans from processes involving AI weakens their monitoring and could threaten the integrity of models (see table for a comprehensive list of AI risks in banking).
At the root of these and other risks is AI’s increasingly inherent complexity, says Prag Sharma, senior vice-president and emerging technology lead at Citi Innovation Labs. “Some AI models can look at millions or sometimes billions of parameters to reach a decision,” he says. “Such models have a complexity that many organisations, including banks, have never seen before.” Andreas Papaetis, a policy expert with the European Banking Authority (EBA), believes this complexity—and especially the obstacles it poses to explainability—are among the chief constraints on European banks’ use of AI to date.
Governance challenges
The guidance that regulators have offered so far can be described as “light touch”, taking the form of information and recommendations rather than rules or standards. One possible reason for this is to avoid stifling innovation. “The guidance from governing bodies where we operate continues to encourage innovation and growth in this sector,” says Mr Sharma.
Another reason is uncertainty about how AI will evolve. “AI is still at an early stage in banking and is likely to grow,” says Mr Papaetis. “There isn’t anyone who can answer everything about it now.”
The documents that banking regulators have published on AI range from the succinct (an 11-page statement of principles by MAS—the Monetary Authority of Singapore) to the voluminous (a 195-page report by Germany’s BaFin—its Federal Financial Supervisory Authority), but the guidance they offer converges in several areas.
At the highest level, banks should establish ethical standards for their use of AI and systematically ensure that their models comply. The EBA suggests using an “ethical by design” approach to embed these principles in AI projects from the start. It also recommends establishing an ethics committee to validate AI use cases and monitor their adherence to ethical standards.4
For regulators, paramount among the ethical standards must be fairness—ensuring that decisions in lending and other areas do not unjustly discriminate against individuals or specific groups of people. De Nederlandsche Bank (or DNB, the central bank of the Netherlands) emphasises the need for regular reviews of AI model decisions by domain experts (the “human in the loop”) to help guard against unintentional bias.5 The Hong Kong Monetary Authority (HKMA) advises that model data be tested and evaluated regularly, including with the use of bias-detection software.6 “If you have a good understanding of your underlying data,” says Mr Sharma, “then a lot of the algorithmic difficulties in terms of ethical behaviour or explainability can be addressed more easily”.
Monitoring the modellers at Citi
Bias can creep into AI models in any industry but banks are better positioned than most types of organisations to combat it, believes Prag Sharma, senior vice-president and emerging technology lead at Citi Innovation Labs. “Banks have very robust processes in place, learned over time, that meet strict external [regulatory] and internal compliance requirements,” he says.
At Citi, a model risk management committee reports directly into the bank’s chief risk officer and operates separately from the modellers and data science teams. Consisting of risk experts as well as data scientists, the committee’s task, says Mr Sharma, is to scrutinise the models that his team and others are developing exclusively from a risk perspective. The committee’s existence long predates the emergence of AI, he says, but the latter has added a challenging new dimension to the committee’s work.
Maximising algorithms’ explainability helps to reduce bias. Once a team is ready to deploy a model into production, the model risk management committee studies it closely with explainability one of its key areas of focus. “[The risk managers] instruct us to explain all the model’s workings to them in a way that they will completely understand,” says Mr Sharma. “Nothing hits our production systems without a green light from this committee.”
Ensuring the right level of explainability, as Mr Papaetis suggests, is arguably banks’ toughest AI challenge. Most of the regulator guidance stresses the need for thorough documentation of all the steps taken in model design.
Ensuring the right level of explainability is arguably banks’ toughest AI challenge.
The EBA, says Mr Papaetis, recommends taking a “risk-based approach” in which different levels of explainability are required depending on the impact of each AI application—more, for example, for activities that directly impact customers and less for low-risk internal activities.
Are more prescriptive approaches needed?
Regulators generally consider banks’ existing governance regimes to be adequate to address the issues raised by AI. Rather than creating new AI-specific regimes, most regulators agree that current efforts should instead be focused on updating their governance practices and structures to reflect the challenges posed by AI. Ensuring that the individuals responsible for oversight have adequate AI expertise is integral, according to DNB.
Fit for purpose? Applying existing governance principles to AI
In Europe, bank adoption of AI-based systems may be described as broad but shallow. In a recently published study the European Banking Authority (EBA) found that about two-thirds of the 60 largest EU banks had begun deploying AI but in a limited fashion and “with a focus on predictive analytics that rely on simple models”.7 This is one reason why Andreas Papaetis, a policy expert with the EBA, believes it is too early to consider developing new rules of governance for the EU’s banks that focus on AI.
Mr Papaetis points out that the EBA’s existing guidelines on internal governance and ICT (information and communications technology) risk management are adequate for AI’s current level of development in banking. The existing framework is sufficiently flexible and not overly prescriptive, he says. “That enables us to adapt and capture new activities or services as they develop. So at the moment we don’t think that AI or machine learning require anything additional when it comes to governance.” In any event, the EBA’s approach, he says, will be guided by European Commission policy positions on the role of AI in the economy and society.8
Mr Papaetis does not exclude the possibility of more detailed regulatory guidance on AI in areas such as data management and ethics. Should bias and a lack of explainability prove to be persistent problems, for example, regulators may need to consider drafting more specific rules. But at present, he says, “no one can predict what challenges AI will throw up in the future”.
More regulatory guidance will almost certainly be needed in the future, says Mr Sharma, and some of it may require the drafting of rules. He offers as an example the uncertainty among experts around the retraining of existing AI models. “Does retraining a model lead to the same or a new model from a risk perspective?” he asks. “Does a model need to go through the same risk review process each time it is retrained, even if that happens weekly, or is a lighter-touch approach possible and appropriate?”
Should a major failure be attributed to AI— such as significant financial losses suffered by a group of customers due to algorithm bias, evidence of systematic discrimination in credit decisions or algorithm-induced errors that threaten a bank’s stability—authorities would no doubt revisit their previous guidance and possibly put regulatory teeth into their non-binding recommendations.
The need to monitor and mitigate such risks effectively makes it incumbent on regulators to build AI expertise that meets or betters that of commercial banks. As AI evolves, strong governance will inevitably be demanded at all levels of the banking ecosystem.
[1] Antoine Gara, “The World’s Best Banks: The Future Of Banking Is Digital After Coronavirus”, Forbes, June 8th 2020. https://www.forbes.com/sites/ antoinegara/2020/06/08/the-worlds-best-banks-the-future-of-banking-is-digital-after-coronavirus/
[2]Top three responses shown. For full results “Forging new frontiers: advanced technologies will revolutionise banking”, The Economist Intelligence Unit, 2020. https://eiuperspectives.economist.com/financial-services/forging-new-fro...
[3] The Economist Intelligence Unit reviewed 25 reports, discussion papers and articles published in the past three years by banking and financial sector supervisory authorities, central banks and supranational institutions, as well a handful of reports from universities and consultancies, on the theme of managing the risks associated with AI. The points of guidance listed below are distilled from studies and discussion papers published in the past two years by financial sector supervisory authorities, regulatory agencies and supranational institutions. These include the European Banking Authority, Monetary Authority of Singapore, DNB (Bank of the Netherlands), Hong Kong Monetary Authority, CSSF (Financial Sector Supervisory Authority of Luxembourg), BaFin (Federal Financial Supervisory Authority of Germany), ACPR (Prudential Supervision and Resolution Authority of France), and the European Commission.
[4] European Banking Authority, EBA Report on Big Data and Advanced Analytics, January 2020. https://eba.europa.eu/file/609786/ download?token=Mwkt_BzI
[5] De Nederlandsche Bank, General principles for the use of Artificial Intelligence in the financial sector, July 2019. https://www.dnb.nl/en/binaries/ General%20principles%20for%20the%20use%20of%20Artificial%20Intelligence%20in%20the%20financial%20sector2_tcm47-385055.pdf
[6] Hong Kong Monetary Authority, Reshaping Banking with Artificial Intelligence, December 2019. https://www.hkma.gov.hk/media/eng/doc/keyfunctions/finanical-infrastruct...
[7] ibid.
[8] The commission launched a public debate on AI policy options in early 2020 and is expected to announce its policy decisions later this year.
Digital frontiers: the new banking imperative | Infographic
Click here to read the article.
Customer experience: learning from online personal finance conversations
New research from The Economist Intelligence Unit, based on an analysis of over 10m conversations in public forums about personal finances, has sought to better understand consumer preferences when it comes to retail banking services. It finds that:
Fintech start-ups are strongly associated with financial empowerment, but also twice as likely to be associated with security and privacy concerns when compared to traditional banks. Traditional banks retain strong associations with trustworthiness, a wider range of services and perks such as loyalty programmes.In the battle for consumers, there remains everything to play for.
Digital and traditional banks are engaged in a fierce battle for customers. Start-up, digital-first banks and investment services, such as Monzo, N26 and Robinhood, have come to market promising superior customer experience and a rich array of services, such as budgeting apps and automated, low-cost investment tools. But traditional banks still benefit from trust, reliability and a wider range of services. And increasingly, spurred on by a crowded field of agile new digital upstarts, they are investing heavily in their digital capabilities—to great effect.
Key to this battle between old and new is whether innovators can scale up and broaden their appeal faster than incumbents can innovate.
A deep understanding of customer behaviour and sentiment will be essential to success for any financial player, new or old. One resource to help firms do this are the millions of conversations that consumers are having about personal finance in public online forums. What banking tools and services are customers most frequently discussing, in what terms? Which keywords relating to banking services are rising and falling in frequency over time? Which associations are there between discussions of negative customer experience and different types of bank?
To answer these questions, The Economist Intelligence Unit (EIU) developed a natural language processing model to analyse over 10m online English-language conversations about personal finance. The resulting clusters, associations and patterns show key strengths and weaknesses of traditional and challenger banks in terms of how well they are meeting customer needs.
Our research methodology
We analysed over 10m online conversations about finance and banking dating back to 2013, drawn from English-language personal finance forums on Reddit, a social discussion website. The sample reflects a global community of English speakers, predominately from the UK and US. Using machine-learning algorithms, we sifted millions of comments into distinct word clusters to reveal which words and phrases appear most frequently, and which are most regularly associated with each other.
Financial empowerment and customer loyalty
Largely, next-generation banks have proven popular because they have used technology to offer customers richer services than their conventional counterparts, from spending analytics to budgeting tools and low-cost investment platforms.
Discussions about “investment” have grown in frequency since 2015, and our analysis shows that 14.4% of conversations that discuss challenger banks include associations with financial empowerment capabilities such as tracking and budgeting, compared with just 2% of conversations that discuss traditional banks. In response to low interest rates being offered by conventional savings accounts, more everyday consumers have taken advantage of low-cost investment portfolio services offered by fintech firms and algorithm-driven “robo-advisors”.
According to a survey of 305 global banking executives carried out by the EIU, investments (self-executed or robo-advisory) are the number one area where new entrants are expected to gain market share in the coming years.
Jason Bates, co-founder of app-based banks Monzo and Starling, as well as 11:FS, a fintech consultancy, believes that challenger banks have done a better job of understanding customer’s financial lives and building products around them. “Banks haven’t been great at delivering services to help deal with the realities of day-to-day life. They just say, ‘great to see you, here’s your balance, here are your transactions, here is how you move money. Good luck. And if you spend more than you’ve got, we’ll charge you".
He distinguishes here between “digitisation”, where banks simply move their paper or in-person branch processes online and into apps, to truly “digital” innovation that imagines new services. Digitisation is analogous to the re-creation of a newspaper on an iPad. Digital transformation, in contrast, is exemplified in new media platforms, such as iTunes or Spotify. “The operating model here fundamentally changed. It’s not only about music—it is also about discovery and sharing.” In the financial services space, Mr Bates believes, truly digital innovations will be those that are real-time, intelligent, social or contextual.
But while many consumers are turning towards disruptive fintech platforms for enriched tools and services to bolster their personal finances, traditional banks remain heavily associated with rewards and loyalty programmes—one of the most discussed subjects overall. In our analysis, a quarter (24.9%) of conversations about traditional banks were related to credit cards or reward programmes, compared to just 2.4% of those involving challengers. Here traditional banks benefit from their age and experience, having built up significant loyalty with customers (whose perks accumulate over the years), and leveraging the reputation and reliability needed to strike commercial partnerships with companies in sectors like air travel and hospitality.
In the future, loyalty programmes and points schemes will be a customer experience domain that will benefit from better data and analytics about customer preferences and behaviours, leading to more tailored offerings. In this environment, it is more than possible for fintech firms to excel in points and perks services, provided that their brands are strong enough to form the right partnerships.
Fintech firms are already making in-roads. Point, a new US challenger bank whose investor roster includes backers of N26 and TransferWise, offers cash-redeemable points for groceries as well as services like Netflix and Spotify. Another US digital bank, Current, offers points on transactions at participating merchants, which include Subway and Rite Aid, although currently the cash can only be spent on upgrading to the bank’s own premium service. Some firms are flipping the entire points model on its head: US-based Tally gives users points for saving, which they can redeem for gift cards at retailers such as Amazon and Target, and services including Uber. Time will tell if non-traditional banks can sustain points systems, given their net cost, especially during the early (usually lossmaking) years.
Safety and security: favouring the tried and trusted
If challenger banks have brought to market better customer experience and enhanced services, traditional banks still have an important advantage in terms of trust and reliability. Our analysis found that 13.7% of conversations about challenger banks included associations with concerns about safety, security or privacy, compared with only 6.7% of those about traditional banks.
Privacy is a major subject, particularly for fintech services that link different institutions’ financial data. In discussions of retail banking, safety was the only language cluster to experience significant proportional growth over time, a consequence of a broader concern about digital privacy in recent years, heightened by high-profile cyber hacks and data breaches.
Many prominent challenger banks have slipped up on security and reliability, including through service outages and glitches. They have also had run-ins with regulators and faced criticism over issues such as capital adequacy ratios, anti-money-laundering protocols, audit quality, and consumer vulnerability in areas like investing. With challenger banks and fintech platforms often still in the venture-funded, pre-profit phase, there are questions about their long-term survival that could limit their ability to become primary providers of services—especially in a time of such economic uncertainty. This may put pressure on their appeal as they seek to develop from scale to profitability.
Customer experience: the survival imperative
For newcomers and incumbents, customercentricity is a widely shared priority. In the global banking survey conducted by the EIU as part of this research programme, improving customer experience and engagement, including personalisation, was cited as the top strategic priority through to 2025 and a topthree factor impacting banks.
“Core financial services are becoming more commoditised, and price competition only goes so far,” says Millie Gillon, global head of retail banking customer experience at Standard Chartered bank. “If we can’t win on price alone, we need to focus on experience. That will help us to differentiate”. Some incumbents have strengthened their customer experience offering through acquisitions, such as CapitalOne’s purchase of Adaptive Path, a design and user experience consultancy.
To flourish in customer experience excellence, banks must find new ways to listen to their clients—and to understand customer trends more broadly. “There’s a heightened awareness among established companies about the importance of putting clients first and centre, and then building our offerings around them, as opposed to the old method of, ‘If we build it, they will come,’” says Ms Gillon.
Innovators are those who understand the “brutal realities” of customers’ daily lives, says Mr Bates. “We never ask customers, ‘what would you like us to build?’ because they are experts at talking about their problems and experience, not product development. Our approach to creating new digital services is to talk to customers about the issues in their daily life and then look at how you can deliver against that.”
Ethnographic research, for instance, is allowing Standard Chartered to “dig deep into customer’s psychographics”, says Ms Gillon, helping them to understand their motivations, goals and fears. “By doing this, we can start to really understand, empathise and put ourselves in their shoes”.
“We want to try to be much more empathetic, because once we have empathy, we’re more human. When we’re more human, that’s when we can truly be client-centric”.
An open thread: customer experience in transition
Amid the coronavirus crisis, customer priorities are rapidly changing. “A lot of people are just thinking ‘What’s truly important to me right now?’ Because this year, most people’s goal is just to survive,” says Ms Gillon. They’re also saying, ‘what’s important is not just me as your client but servicing the needs of my entire family.’ It’s much more familial. It’s really about getting down to the root of what’s most important now”.
Such shifting priorities threaten the business model of start-ups that have built offerings on perks such as free currency exchange services and spending analytics tools, which are losing relevance at a time of falling earnings. Incumbent banks have seen some advantages, in the form of increased saving (the US savings rate hit a record 33% in April). But additional income from fees and deposits is being more than offset by falling margins and the need to put aside large quantities to cover loan losses. In this environment, a smart “listening” strategy will not only help banks to know whether their services are hitting the mark; it will also give them insights into market changes.
More optimistically, banks are realising that the field of “financial services” is far bigger than ever before. Open banking regulations, which allow third parties to build financial products linked to customers’ payment accounts, are likely to herald a period of evolution into a broader “open finance” era that will apply the same principles to savings, insurance, mortgages, investments, pensions and credit.
This could see fintech become ubiquitous in areas far beyond core banking. Our analysis shows many domains in which consumers discuss personal finance with no associations with their banks at all: the entire class of retail banks (incumbents and challengers) are only associated with 18% of total personal finance discussions, with the rest covering everything from divorces and wills to car buying (see graphic). This suggests there is room for banks to assist customers in many more areas of their personal finances.
The EIU’s survey also backs evidence of banking shifting towards becoming an ecosystem of interlinked services: the most commonly cited business model transformation, by 45% of respondents, was “acting as a true digital ecosystem (offering own and third-party banking and non-banking products and services to own customers, as well as to other financial services organisations)”.
Incumbent banks will move at different speeds in capturing new markets; some may deploy new offerings while others will remain the infrastructure “pipes”, as with telecommunications companies in the 4G transition, who facilitated, but were not innovators in, breakthroughs like streaming. We will also see more partnerships between fintech firms and established players. Accelerators, direct acquisitions and service agreements are all ways that big banks are already working with rather than against newcomers to leverage the strengths of each party, and the commercial logic of cooperation will grow as banking expands its service offering.
“In an ideal world,” says Ms Gillon, “there will be a combination where fintechs and established banks can play together. Then you have the winning combination of speed, drive, innovation, a willingness to experiment, sound risk management, trust and the learning that comes from more established companies.
While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor.
The Hidden Data Economy: Companies need to get serious about managing and leveraging data
Related content
The data directive
The data directive is an Economist Intelligence Unit (EIU) report, commissioned by Wipro. It seeks to explore the degree to which the ongoing data revolution is delivering truly strategic change within companies, as opposed to more incremental optimisation gains.
Research MethodologyThe research draws on two primary inputs:
A wide-ranging survey of 318 C-suite executives, divided between CEOs (13%), CFOs (20%), COOs (13%), CIOs (12%), CMOs (9%), and other C-suite roles.
In-depth interviews with business executives and experts.
Big data and consumer products companies
Big data and consumer products companies: People, processes and culture barriers is an Economist Intelligence Unit report explores a range of issues associated with successfully implementing so-called “big data” initiatives within the global consumer products sector. In particular, it focuses on people and skills challenges; process and organisational structure considerations; and cultural changes as a result of such initiatives. The research was sponsored by SAP.
The likes of Google, Amazon and Facebook tend to capture the majority of the headlines relating to running data-based businesses. Yet a quiet revolution is under way within the global consumer products industry. Unilever alone claims that 2bn people use one of its products every single day, while Proctor & Gamble (P&G) handles over 4bn daily transactions. Indeed, although much of the technology industry is often prone to hyperbole, the consumer products sector truly has the capability to generate “big” data—spanning point-of-sale information, customer sentiment, weather forecasts, supplychain tracking and far more. But working out how best to fully exploit all these data for competitive advantage is another challenge altogether. Many focus on the technology issues alone, which is certainly one key consideration, but is not the biggest difficulty in big data. Instead, there are several other major challenges, often overlooked, which this report seeks to highlight. Some of its findings include the following.
People, processes and culture, rather than technology, are the biggest challenges to overcome in fully implementing big data within consumer products companies. While the headline technology figures and challenges are often startling—as early as 1998 P&G had already captured over 920,000 gigabytes of data, for example, which is no mean IT challenge—many experts and executives agree that the technology issues are not the biggest barrier. Instead, the real difficulties lie elsewhere: finding the right people and skills to make use of such information; adjusting organisational processes to take advantage of the insights generated; and switching the management culture to one that is far more data-centric in the way it operates and makes decisions.
A severe skills shortage is the most obvious barrier to growth, with consumer products firms competing for scarce talent across deep-pocketed rivals. Probably the single most pressing issue for consumer products firms seeking to tap big data is a shortage of talent. Until the job title was coined in 2008, the role of “data scientist” simply didn’t exist; today, just one online jobs site in the United States lists over 8,000 such roles, while another in the UK lists well over 1,000. The Harvard Business Review recently dubbed it the “sexiest job of the 21st century”. But with demand far outstripping supply, these roles will not all be filled. And for the consumer products sector, the challenge of hiring is exacerbated by the fact that they are competing for this rare talent against the likes of hi-tech firms, banks and biotech companies, all of which are willing to pay generously to secure the people they need.
As consumer products firms seek to uncover new insights from big data, they will need to give thought to the organisational structures and processes needed to properly take action on these. To make the most of what a datacentric business can offer, consumer products firms will need to change how they act on the insights generated. While existing analytics queries are often more vertically focused (for example, how are customers reacting to this specific product), big data can often garner more horizontal insights across the business (which products are likely to do better or worse this year, perhaps). This raises questions about where a specialist data team is best placed within the organisation—to whom should they report, and what degree of autonomy should they have to suggest radical new approaches, among other considerations.
The era of big data will raise new questions about where this core competency is placed within the business. Just as many companies debate the merits of centralised versus decentralised in functions such as finance, marketing and IT, so too is this a consideration within big data. Data initiatives are often launched within specific product lines or to support a particular customer initiative, but many believe that this will increasingly become a more centralised function, reporting to a key C-suite role such as the CFO or even the CEO. And even if this does not transpire, others see a chance for the era of big data to make IT a more strategic partner for the rest of the business. Regardless of how this debate plays out, IT has a clear role to play in making big data-related queries simpler, more visual and more interactive for managers and analysts.
As instinct gives way to evidence, management cultures within consumer products firms will need to adapt. Several management adjustments lie ahead for consumer products firms adopting big data. Given the expanding variety of data now being gathered—from point-of-sale data and consumers’ social media posts through to customer location information—leaders are having to get far more creative in the kinds of questions they ask. In parallel with this, executives are finding that decision-making is happening much faster, and often within a more collaborative, crossfunctional environment. Others are reconsidering how accurate data need to be before they become useful and actionable. All of these shifts imply changes in the nature of the decision-making and leadership culture within the consumer products business.
Fostering a data-driven culture
"Fostering a data-driven culture" explores the challenges in nurturing a data-driven culture, and what companies can do to meet them.